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microeconomics principles

Questions and Answers of Microeconomics Principles

If the inverse demand function is p = 300 - 3Q, what is the marginal revenue function? Draw the demand and marginal revenue curves. At what quantities do the demand and marginal revenue lines hit the
A competitive industry with an upward-sloping supply curve sells Qh of its product in its home country and Qf in a foreign country, so the total quantity it sells is Q = Qh + Qf . No one else
Initially, electricity is sold in New York and in other states at a competitive single price. Now suppose that New York restricts the quantity of electricity that its citizens can buy. Show what
A central city imposes a rent control law that places a binding ceiling on the rent that can be charged for an apartment. The suburbs of this city do not have rent control. What happens to the rental
Peaches are sold in a competitive market. There are two types of demanders: consumers who eat fresh peaches and canners. If the government places a binding price ceiling only on peaches sold directly
Suppose that society used the “opposite” of a Rawlsian welfare function: It tried to maximize the wellbeing of the best-off member of society. Write this welfare function. What allocation
Give an example of a social welfare function that leads to the egalitarian allocation that everyone should be given exactly the same bundle of goods.
A society consists of two people with utilities U1 and U2, and the social welfare function is W = α1U1 + α2U2. Draw a utility possibilities frontier similar to the ones in Figure 10.8. Use calculus
Mexico and the United States can both produce food and toys. Mexico has 100 workers and the United States has 300 workers. If they do not trade, the United States consumes 10 units of food and 10
Modify Solved Problem 10.5 to show that the PPF more closely approximates a quarter of a circle if there are six people. One of these new people, Bill, can produce five cords of wood, or four candy
If Jane and Denise have identical, linear production possibility frontiers (see the Jane and Denise example in the text), are there gains to trade? Explain.(Hint: See Solved Problem 10.5.)
Suppose that Britain can produce 10 units of cloth or 5 units of food per day (or any linear combination) with available resources and that Greece can produce 2 units of food per day or 1 unit of
In panel c of Figure 10.5, the joint production possibility frontier is concave to the origin. When the two individual production possibility frontiers are combined, however, the resulting PPF could
In an Edgeworth box, illustrate that a Paretoefficient equilibrium, pointa, can be obtained by competition, given an appropriate endowment. Do so by identifying an initial endowment point, b, located
Continuing with Exercise 2.7, determine p, the competitive price of G, where the price of H is normalized to equal one. (Hint: See Solved Problem 10.4.) M 3. Competitive Exchange
In a pure exchange economy with two goods, G and H, the two traders have Cobb-Douglas utility functions. Suppose that Tony’s utility function is Ut = Gt Ht and Margaret’s utility function is Um =
Continuing with Exercise 2.5, what are the competitive equilibrium prices, where one price is normalized to equal one? (Hint: See Solved Problem 10.4.) M
Adrienne and Stephen consume pizza, Z, and cola, C. Adrienne’s utility function is UA = ZACA, and Stephen’s is UA = Z0.5 s C0.5 s . Their endowments are ZA = 10, CA = 20, ZS = 20, and CS = 10.a.
Two people trade two goods that they cannot produce. Suppose that one consumer’s indifference curves are bowed away from the origin—the usual type of curves—but the other’s are concave to the
The two people in a pure exchange economy have identical utility functions. Will they ever want to trade? Why or why not?
Explain why point e in Figure 10.3 is not on the contract curve. (Hint: See Solved Problem 10.2.)
Initially, Michael has 10 candy bars and 5 cookies, and Tony has 5 candy bars and 10 cookies. After trading, Michael has 12 candy bars and 3 cookies.In an Edgeworth box, label the initial allocation
Competitive firms in Africa sell their output only in Europe and the United States (which do not produce the good themselves). The industry’s supply curve is upward sloping. Europe puts a tariff of
Suppose that the government gives a fixed subsidy of T per firm in one sector of the economy to encourage firms to hire more workers. What is the effect on the equilibrium wage, total employment, and
What is the effect of a subsidy of s per hour on labor in only one sector of the economy on the equilibrium wage, total employment, and employment in the covered and uncovered sectors? (Hint: See
Philadelphia collects an ad valorem tax of 3.928%on its residents’ earnings (see the Application“Urban Flight”), unlike the surrounding areas.Show the effect of this tax on the equilibrium
Initially, all workers are paid a wage of w1 per hour.The government taxes the cost of labor by t per hour only in the “covered” sector of the economy.That is, if the wage workers receive in the
The demand curve in Sector 1 of the labor market is L1 = a - bw. The demand curve in Sector 2 is L2 = c - dw. The supply curve of labor for the entire market is L = e + fw. In equilibrium, L1 + L2 =
The market demand for medical checkups per day is QF = 25(198 + nC /20,000 - pF), where nC is the number of patients per day who are at least 40 years old, and pF is the price of a checkup. The
The demand functions for each of two goods depend on the prices of the goods, p1 and p2: Q1 = 15 - 3p1 + p2 and Q2 = 6 - 2p2 + p1.However, each supply curve depends only on its own price: Q1 = 2 + p1
The demand functions for the only two goods in the economy are Q1 = 10 - 2p1 + p2 and Q2 = 10 - 2p2 + p1. There are five units of each good. Solve for the equilibrium: p1, p2, Q1, and Q2. M
There are many possible ways to limit the number of cabs in a city. The most common method is an explicit quota using a fixed number of medallions that are good forever and can be resold. One
In 2002, Los Angeles imposed a ban on new billboards. Owners of existing billboards did not oppose the ban. Why? What are the implications of the ban for producer surplus, consumer surplus, and
A government is considering a quota and a tariff, both of which will reduce imports by the same amount. Why might the government prefer one of these policies to the other?7. Challenge
During the Napoleonic Wars, Britain blockaded North America, seizing U.S. vessels and cargo and impressing sailors. At President Thomas Jefferson’s request, Congress imposed a nearly
In the first quarter of 2012, the world price for raw sugar, 24¢ per pound, was about 70% of the domestic price, 34¢ per pound, because of quotas and tariffs on sugar imports. Consequently,
After Mexico signed the North American Free Trade Agreement (NAFTA) with the United States in 1994, corn imports from the United States doubled within a year, and today U.S. imports make up nearly
Given that the world supply curve is horizontal at the world price for a given good, can a subsidy on imports raise welfare in the importing country?Explain your answer.
Show that if the importing country faces an upwardsloping foreign supply curve (excess supply curve), a tariff may raise welfare in the importing country.
The U.S. government claimed that China and Vietnam were dumping shrimp in the United States at a price below cost, and proposed duties as high as 112%. Suppose that China and Vietnam were subsidizing
and supply function in Equation 9.4, use calculus to determine the change in deadweight loss from a marginal increase in a tariff, evaluated where the tariff is initially zero.(Hint: You are being
Based on the estimates of the U.S. daily oil demand function in Equation
In Solved Problem 9.4, if the domestic demand curve is Q = 20p-0.5, the domestic supply curve is Q = 5p0.5, and the world price is 5, use calculus to determine the changes in producer surplus,
Canada has 20% of the world’s known freshwater resources, yet many Canadians believe that the country has little or none to spare. Over the years, U.S. and Canadian firms have struck deals to
to evaluate the effect of the Court’s decision on the price of wine in New York.b. Evaluate the increase in New York consumer surplus, producer surplus, and welfare.
The U.S. Supreme Court ruled in May 2005 that people can buy wine directly from out-of-state vineyards. The Court held that state laws requiring people to buy directly from wine retailers within the
Although 23 states barred the sale of self-service gasoline in 1968, most removed the bans by the mid-1970s. By 1992, self-service outlets sold nearly 80% of all U.S. gas, and only New Jersey and
A mayor wants to help renters in her city. She considers two policies that will benefit renters equally.One policy is a rent control, which places a price ceiling, p, on rents. The other is a
What are the welfare effects of a binding minimum wage? Use a graphical approach to show what happens if all workers are identical. Then describe in writing what is likely to happen to workers who
What were the welfare effects (who gained, who lost, what was the deadweight loss) of the gasoline price controls described in Chapter 2? Add the relevant areas to a drawing like Figure 2.14. (Hint:
The government wants to drive the price of soybeans above the equilibrium price, p1, to p2. It offers growers a payment of x to reduce their output from Q1(the equilibrium level) to Q2, which is the
Suppose that the demand curve for wheat is Q = 100 - 10p and the supply curve is Q = 10p.The government imposes a price ceiling of p = 3.a. Describe how the equilibrium changes.b. What effect does
Suppose that the demand curve for wheat is q = 100 - 10p and the supply curve is q = 10p.The government imposes a price support at p = 6 using a deficiency payment program.a. What is the quantity
The United States not only subsidizes producers of cotton (in several ways, including a water subsidy and a price support) but also pays $1.7 billion to U.S. agribusiness and manufacturers to buy
What is the welfare effect of a lump-sum tax, l, assessed on each competitive firm in a market?(Hint: See the Challenge Solution in Chapter 8.)
What is the long-run welfare effect of a profit tax(the government collects a specified percentage of a firm’s profit) assessed on each competitive firm in a market?
What is the welfare effect of an ad valorem sales tax, α, assessed on each competitive firm in a market?
shows the original demand and supply curves.)What is the effect of the subsidy on the equilibrium prices and quantity, consumer surplus, producer surplus, government expenditures, welfare, and
Suppose that the government gives rose producers a specific subsidy of s = 11. per stem. (Figure
Suppose that the demand curve for wheat is Q = 100 - 10p and that the supply curve is Q = 10p. What are the effects of a subsidy (negative tax) of s = 1 per unit on the equilibrium, government
The initial equilibrium ise, where the linear supply curve intersects the linear demand curve. Show the welfare effects of imposing a specific tax τ. Now suppose the demand curve becomes flatter,
Suppose that the demand curve for wheat is Q = 100 - 10p and that the supply curve is Q = 10p. What are the effects of a specific tax ofτ = 1 per unit on the equilibrium, government tax revenue, CS,
If the inverse demand function for books is p = 60 - q and the supply function is q = p, what is the initial equilibrium? What is the welfare effect of a specific tax of τ = $2 per unit on the
The park service wants to restrict the number of visitors to Yellowstone National Park to Q*, which is fewer than the current volume. It considers two policies: (a) raising the price of admissions
The government imposes a restriction on firms that shifts the supply curve in Figure 9.3 so that it intersects the demand curve at e2. Discuss the effects on CS, PS, welfare, and DWL.
Use an indifference curve diagram (gift goods on one axis and all other goods on the other) to illustrate that one is better off receiving cash than a gift.(Hint: See the discussion of gifts in this
The U.S. Department of Agriculture’s (USDA)minimum general recommendation is five servings of fruits and vegetables a day. Jetter et al. (2004)estimated that if consumers followed that guideline,
Suppose that the inverse market demand for silicone replacement tips for Sony EX71 earbud headphones is p = pN - 0.1Q, where p is the price per pair of replacement tips, pN is the price of a new pair
Suppose that the market demand for 32-oz. wide mouth Nalgene bottles is Q = 50,000p-1.076, where Q is the quantity of bottles per week and p is the price per bottle. The market supply is Q =
If society cared only about the well-being of consumers so that it wanted to maximize consumer surplus, would a competitive market achieve that goal given that the government cannot force or bribe
If the supply function is q = apη, what is the producer surplus if price is p*? (Hint: See Solved Problem 9.1.) M 3. How Competition Maximizes Welfare
If the supply curve is q = 2 + 2p, what is the producer surplus if the price is 10? (Hint: See Solved Problem 9.1.) M
For a firm, how does the concept of producer surplus differ from that of profit?
The reputations of some of the world’s most prestigious museums have been damaged by accusations that they obtained antiquities that were looted or stolen in violation of international laws and
Only a limited amount of high-quality wine-growing land is available. The firms that farm the land are identical. Because the demand curve hits the market supply curve in its upward sloping section,
Answer the Challenge problem using calculus.(Note: This comparative statics problem is difficult because you will need to solve two or three equations simultaneously, and hence you may need to use
The finding that the average real price of abortions has remained relatively constant over the last 25 years suggests that the supply curve is horizontal.Medoff (1997) estimated that the price
In a perfectly competitive market, all firms are identical, there is free entry and exit, and an unlimited number of potential entrants. Now, the government starts collecting a specific tax τ, how
The North American Free Trade Agreement provides for two-way, long-haul trucking across the U.S.-Mexican border. U.S. truckers have objected, arguing that the Mexican trucks don’t have to meet the
Answer the Challenge for the short run rather than for the long run. (Hint: The answer depends on where the demand curve intersects the original short-run supply curve.)
In the Challenge Solution, would it make a difference to the analysis whether the lump-sum costs such as registration fees are collected annually or only once when the firm starts operation?How would
In late 2004 and early 2005, the price of raw coffee beans jumped as much as 50% from the previous year. In response, the price of roasted coffee rose about 14%. Similarly, in 2012, the price of raw
Cheap handheld video cameras have revolutionized the hard-core pornography market.Previously, making movies required expensive equipment and some technical expertise. Today, anyone with a couple
The Application “Upward-Sloping Long-Run Supply Curve for Cotton” shows a supply curve for cotton. Discuss the equilibrium if the world demand curve crosses this supply curve in either(a) a flat
In 2009, the voters of Oakland, California, passed a measure to tax medical cannabis (marijuana), effectively legalizing it. In 2010, the City Council adopted regulations permitting industrial-scale
A 2010 law requires that people who buy food or alcohol in Washington, D.C., have to pay an extra nickel for every paper or plastic bag the store provides them. Does such a tax affect marginal
Navel oranges are grown in California and Arizona. If Arizona starts collecting a specific tax per orange from its firms, what happens to the long-run market supply curve? (Hint: You may assume that
Is the long-run supply curve for a good horizontal only if the long-run supply curves of all factors are horizontal? Explain.
To reduce pollution, the California Air Resources Board in 1996 required the reformulation of gasoline sold in California. Since then, every few years, occasional disasters at California refineries
The federal specific tax on gasoline is 18.4¢ per gallon, and the average state specific tax is 20.2¢, ranging from 7.5¢ in Georgia to 25¢ in Connecticut. A statistical study (Chouinard and
Derive the residual supply elasticity in Equation 8.17 using the definition of the residual demand function in Equation 8.16. What is the formula if there are n identical countries? M
The major oil spill in the Gulf of Mexico in 2010 caused the oil firm BP and the U.S. government to greatly increase purchases of boat services, various oil-absorbing materials, and other goods and
Each firm in a competitive market has a cost function of C = q + q2 + q3. There are an unlimited number of potential firms in this market. The market demand function is Q = 24 - p. Determine the
What is the effect on firm and market equilibrium of the U.S. law requiring a firm to give its workers six months’ notice before it can shut down its plant?
Redraw Figure 8.10 to show the situation where the short-run plant size is too large, relative to the optimal long-run plant size.
Given the information in the previous exercise, what effect does a specific tax of $2.40 per unit have on the equilibrium price and quantities? (Hint:See Solved Problem 8.3.) M 4. Competition in the
Each of the 10 firms in a competitive market has a cost function of C = 25 + q2. The market demand function is Q = 120 - p. Determine the equilibrium price, quantity per firm, and market quantity. M
Many marginal cost curves are U-shaped. Consequently, the MC curve can equal price at two output levels. Which is the profit-maximizing output?Why?
A Christmas tree seller has a cost function C = 6,860 + (pT + t + 7/12)q + 37/27,000,000q3, where pT = $11.50 is the wholesale price of each tree and t = $2.00 is the shipping price per tree.What is
If a competitive firm’s cost function is C(q) = a + bq+ cq2 + dq3, wherea, b,c, and d are constants, what is the firm’s marginal cost function? What is the firm’s profit-maximizing condition?

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