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microeconomics principles

Questions and Answers of Microeconomics Principles

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?
When gasoline prices spike, producers consider using oil fields that once had been passed over because of the high costs of extracting oil.a. In a figure, show what this statement implies about the
For Red Delicious apple farmers in Washington, 2001 was a terrible year (Linda Ashton, “Bumper Crop a Bummer for Struggling Apple Farmers,”San Francisco Chronicle, January 9, 2001, C7). The
According to the Application “Oil, Oil Sands, and Oil Shale Shutdowns,” due to technological advances, the minimum average variable cost of processing oil sands dropped from $25 a barrel in the
What is the effect of an ad valorem tax of α (the share of the price that goes to the government) on a competitive firm’s profit-maximizing output? (Hint:See Solved Problem 8.1.)
If a specific subsidy (negative tax) of s is given to only one competitive firm, how should that firm change its output level to maximize its profit, and how does its maximum profit change? Use a
If the pre-tax cost function for John’s Shoe Repair is C(q) = 100 + 10q - q2 + 1 3 q3, and it faces a specific tax of τ = 10, what is its profit-maximizing condition if the market price is p? Can
The government imposes a specific tax of τ = 2 on laundry. Acme Laundry’s pre-tax cost function is C(q) = 10 + 10q + q2. How much should the firm produce to maximize its after-tax profit if the
If the cost function for John’s Shoe Repair is C(q) = 100 + 10q - q2 + 1 3 q3, what is the firm’s marginal cost function? What is its profit-maximizing condition if the market price is p? What is
The cost function for Acme Laundry is C(q) = 10 + 10q + q2, where q is tons of laundry cleaned. What q should the firm choose to maximize its profit if the market price is p? How much does it produce
In Figure 8.3, why is the revenue curve a straight line in panel a? What is the slope of the revenue curve? What is the slope of the profit curve at the q where profit is maximized? What can you say
A firm’s profit function is π(q) = R(q) - C(q)= 120q - (200 + 40q + 10q2). What is the positive output level that maximizes the firm’s profit(or minimizes its loss)? What is the firm’s
Mercedes-Benz of San Francisco advertises on the radio that it has been owned and operated by the same family in the same location for 50 years (as of 2012). It then makes two claims: first, that it
A competitive firm’s bookkeeper, upon reviewing the firm’s books, finds that the company spent twice as much on its plant, a fixed cost, as the firm’s manager had previously thought. Should the
Should a firm shut down (and why) if its revenue is R = $1,000 per week anda. its variable cost is VC = $500, and its sunk fixed cost is F = $600?b. its variable cost is VC = $1,001, and its sunk
Why would high transaction costs or imperfect information tend to prevent price-taking behavior?2. Profit Maximization
A large city has nearly 500 restaurants, with new ones entering regularly as the population grows.The city decides to limit the number of restaurant licenses to 500. Which characteristics of this
Rosenberg (2004) reports the invention of a new machine that serves as a mobile station for receiving and accumulating packed flats of strawberries close to where they are picked, reducing
A U.S. apparel manufacturer is considering moving its production abroad. Its production function is q = L0.7K0.3 (based on Hsieh, 1995). In the United States, w = 7 and r = 3. At its Asian plant, the
A U.S. electronics firm is considering moving its production to a plant in Asia. Its estimated production function is q = L0.5K0.5 (based on Hsieh, 1995). In the United States, w = 10 = r. At its
If it manufactures at home, a firm faces input prices for labor and capital of wn and nr and produces qn units of output using Ln units of labor and Kn units of capital. Abroad, the wage and cost of
In the Challenge Solution, show that for some wage and rental cost of capital the firm is indifferent between using the wafer-handling stepper technology and the stepper technology. How does this
What can you say about Laura’s economies of scope if her time is valued at $5 an hour and her production possibility frontier is PPF1 in Figure 7.10?6. Challenge
A firm’s average cost is AC = αqβ, where α 7 0.How can you interpret α? (Hint: Suppose that q = 1.) What sign must β have if this cost function reflects learning by doing? What happens to
A U-shaped long-run average cost curve is the envelope of U-shaped short-run average cost curves. On what part of the curve (downward sloping, flat, or upward sloping) does a short-run curve touch
California’s State Board of Equalization imposed a higher tax on “alcopops,” flavored beers containing more than 0.5% alcohol-based flavorings, such as vanilla extract (Guy L. Smith, “On
A water heater manufacturer produces q water heaters per day, q, using L workers and S square feet of sheet metal per day, using a constant elasticity of substitution production function, q = (L-2 +
In Solved Problem 7.6, Equation 7.26 gives the longrun cost function of a firm with a constant-returnsto-scale Cobb-Douglas production function. Show how, for a given output level, cost changes as
A production function is homogeneous of degreeγ and involves three inputs, L, K, and M (materials). The corresponding factor prices are w, r, and e.Derive the long-run cost curve. M
Suppose that your firm’s production function has constant returns to scale. What is the long-run expansion path?
The Bouncing Ball Ping Pong Company sells table tennis sets, which include two paddles and one net. What is the firm’s long-run expansion path if it incurs no costs other than what it pays for
For a Cobb-Douglas production function, how does the expansion path change if the wage increases while the rental rate of capital stays the same?(Hint: See Solved Problem 7.5.) M
Derive the long-run cost function for the constant elasticity of substitution production function q = (Lρ + Kρ)1/ρ. (Hint: See Solved Problem 7.4.) M

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