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microeconomics principles

Questions and Answers of Microeconomics Principles

Carolyn and Sanjay are neighbors. Each owns a car valued at $10,000. Neither has comprehensive insurance (which covers losses due to theft). Carolyn’s wealth, including the value of her car is
Suppose that Irma’s utility function with respect to wealth is U(W) = 100 + 100W - W2. Show that for W 6 10, Irma’s Arrow-Pratt risk-aversion measure increases with her wealth. (Hint: See Solved
Lisa just inherited a vineyard from a distant relative.In good years (when there is no rain or frost during harvest season), she earns $100,000 from the sale of grapes from the vineyard. If the
Mary’s utility function is U(W) = W0.33, where W is wealth. Is she risk averse? Mary has an initial wealth of $27,000. How much of a risk premium would she require to participate in a gamble that
Hugo has a concave utility function of U(W) = W0.5. His only asset is shares in an Internet start-up company. Tomorrow he will learn the stock’s value. He believes that it is worth $144 with
Given the information in Solved Problem 16.2, Irma prefers to buy the stock. Show graphically how high her certain wealth would have to be for her to choose not to buy the stock.
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 she is
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
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 fine
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$4,000.
By next year, your stock has a 25% chance of being worth $400 and a 75% probability of being worth$200. What are the expected value and the variance?
Asa buys a painting. There is a 20% probability that the artist will become famous and the painting will be worth $1,000. There is a 10% probability that the painting will be destroyed by fire or
In 2012, the Clarkson Community Schools in Clarkson, Michigan paid its starting teachers $38,087 employees with a bachelor’s degree and $41,802 with a master’s degree. (For simplicity, assume
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 this
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
In the figure in Solved Problem 15.5, suppose that the government’s demand curve remains constant at D1 g but the government starts to tax private earnings, collecting 1% of all interest earnings.
To virtually everyone’s surprise, the Washington Nationals baseball team earned a pretax profit of$20 million in 2005, compared to a $10 million loss when the team was the Montreal Expos in
As discussed in Solved Problem 15.3, Lewis Wolff and his investment group bought the Oakland A’s baseball team for $180 million in 2005. Reportedly, Hall-of-Famer Reggie Jackson offered $25 million
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 20
Two different teams offer a professional basketball player contracts for playing this year. Both contracts are guaranteed, and payments will be made even if the athlete is injured and cannot play.
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
If you buy a car for $100 down and $100 a year for two more years, what is the present value of these payments at a 5% interest rate? If the interest rate is i? M
The estimated Cobb-Douglas production function for a U.S. tobacco products firm is q = L0.2K0.3(“Returns to Scale in U.S. Manufacturing” application, Chapter 6). Derive the marginal revenue
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,
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 demand
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?7. Challenge
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
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.)
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 the
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?
Firms in some industries with a small number of competitors earn normal economic profit. The Wall Street Journal (Gomes, Lee, “Competition Lives On in Just One PC Sector,” March 17, 2003,
At a busy intersection on Route 309 in Quakertown, Pennsylvania, the convenience store and gasoline station, Wawa, competes with the service and gasoline station, Fred’s Sunoco. In the
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 a
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
Suppose that identical duopoly firms have constant marginal costs of $10 per unit. Firm 1 faces a demand function of q1 = 100 - 2p1 + p2, where q1 is Firm 1’s output, p1 is Firm 1’s price, and p2
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
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 Firm
The firms in a duopoly produce differentiated products. The inverse demand for Firm 1 is p1 = 52 -q1 - 0.5q2. The inverse demand for Firm 2 is p2 = 40 - q2 - 0.5q1. Each firm has a marginal cost of m
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 has a
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
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 output,
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 is
Connecticut sets a maximum fee that bail-bond businesses can charge for posting a given-size bond (Ayres and Waldfogel, 1994). The bail-bond fee is set at virtually the maximum amount allowed by law
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 rent) of
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 Corporation’s
According to Robert Guy Matthews, “Fixed Costs Chafe at Steel Mills,” Wall Street Journal, June 10, 2009, stainless steel manufacturers are increasing prices even though the market demand curve
The European Union fined Sotheby’s auction house more than €20 million for operating (along with rival auction house Christie’s) a price-fixing cartel (see “The Art of Price Fixing” in
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
In the game between Intel and AMD in the Challenge Solution, suppose that each firm earns a profit of 9 if both firms advertise. What is the new subgame perfect Nash equilibrium outcome? Show in a
A prisoners’ dilemma game is played for a fixed number of periods. The fully rational solution is for each player to defect in each period. However, in experiments with students, players often
Draw a game tree that represents the ultimatum game in which the proposer is a first mover who decides how much to offer a responder and the responder then decides to accept or reject the offer. The
At the end of performances of his Broadway play“Cyrano de Bergerac,” Kevin Kline, who starred as Cyrano, the cavalier poet with a huge nose, auctioned his prosthetic proboscis, which he and his
Suppose that Anna, Bill, and Cameron are the only people interested in the paintings of the Bucks County artist Walter Emerson Baum. His painting Sellers Mill is being auctioned by a second-price
From the ninth century bc until the proliferation of gunpowder in the fifteenth century ad, the ultimate weapon of mass destruction was the catapult(Wilford, John Noble, “How Catapults Married
Due to learning by doing (Chapter 7), the more that an incumbent firm produces in the first period, the lower its marginal cost in the second period. If a potential entrant expects the incumbent to
Suppose that an incumbent can commit to producing a large quantity of output before the potential entrant decides whether to enter. The incumbent chooses whether to commit to produce a small quantity
A monopoly manufacturing plant currently uses many workers to pack its product into boxes. It can replace these workers with an expensive set of robotic arms. Although the robotic arms raise the
Levi Strauss and Wrangler are planning new generation jeans and must decide on the colors for their products. The possible colors are white, black, and violet. The payoff to each firm depends on the
A thug wants the contents of a safe and is threatening the owner, the only person who knows the code, to open the safe. “I will kill you if you don’t open the safe, and let you live if you do.”
In Solved Problem 13.2, suppose that Mimi can move first. What are the equilibria, and why? Now repeat your analysis if Jeff can move first.2.6. Solve for the Stackelberg subgame-perfect Nash
A small tourist town has two Italian restaurants, Romano’s and Giardino’s. Normally both restaurants prosper with no advertising. Romano’s could take some of Giardino’s customers by running
If the airline game in Table 13.1 is repeated, what happens if the players know the game will last five periods? What happens if the game is played indefinitely but one or both firms care only about
In a repeated game, how does the outcome differ if firms know that the game will be (a) repeated indefinitely, (b) repeated a known, finite number of times, (c) repeated a finite number of times but
Two firms are planning to sell 10 or 20 units of their goods and face the following profit matrix:Firm 2 35 50 40 20 60 20 30 30 10 20 Firm 1 10 20 Exercisesa. What is the Nash equilibrium if both
Acura and Volvo offer warranties on their automobiles, where wA is the number of years of an Acura warranty and wV is the number of years of a Volvo warranty. The revenue for Firm i, i = A for Acura
The 100-meter Olympic gold medalist and the 200-meter Olympic gold medalist have agreed to a 150-meter duel. Before the race, each athlete decides whether to improve his performance by taking
Suppose that you and a friend play a “matching pennies” game in which each of you uncovers a penny. If both pennies show heads or both show tails, you keep both. If one shows heads and the other
In the novel and film The Princess Bride, the villain Vizzini kidnaps the princess. In an attempt to rescue her, the hero, Westley, challenges Vizzini to a battle of wits. Consider this variation on
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

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