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microeconomics principles

Questions and Answers of Microeconomics Principles

Elise consumes cans of anchovies, q1, and boxes of biscuits, q2. Each of her indifference curves reflects strictly diminishing marginal rates of substitution.Where q1 = 2 and q2 = 2, her marginal
What happens to the budget line if the government applies a specific tax of $1 per gallon on gasoline but does not tax other goods? What happens to the budget line if the tax applies only to
Governments frequently limit how much of a good a consumer can buy. During emergencies, governments may ration “essential” goods such as water, food, and gasoline rather than let their prices
What happens to a consumer’s optimal choice of goods if all prices and the consumer’s income double? (Hint: What happens to the intercepts of the budget constraint?)
Phil’s quasilinear utility function is U(q1, q2) = ln q1 + q2. Show that his MRS is the same on all of his indifference curves at a given q1.(Hint: Look at Solved Problem 3.3.) M 3. Budget
If José Maria’s utility function is U(q1, q2) = q1 +Aq1 a q2 b + q2, what is his marginal utility from q2? What is his marginal rate of substitution between these two goods? (Hint: Look at Solved
What is the MRS for the CES utility function (which is slightly different from the one in the text), U(q1,q2) = (aq1ρ + [1 - a]q2ρ)1/ρ ? (Hint: Look at Solved Problem 3.2.) M
Suppose we calculate the MRS at a particular bundle for a consumer whose utility function is U(q1, q2). If we use a positive monotonic transformation, F, to obtain a new utility function, V(q1, q2) =
Tiffany’s constant elasticity of substitution (CES)utility function is U(q1, q2) = (q 1ρ + q 2ρ )1/ρ. Show that there is a positive monotonic transformation such that there is an equivalent
Miguel considers tickets to the Houston Grand Opera and to Houston Astros baseball games to be perfect substitutes. Show his preference map. What is his utility function?*2.2 Sofia will consume hot
Arthur spends his income on bread and chocolate.He views chocolate as a good but is neutral about bread, in that he doesn’t care if he consumes it or not. Draw his indifference map.2. Utility
Can an indifference curve be downward sloping in one section, but then bend backward so that it forms a “hook” at the end of the indifference curve?(Hint: Look at Solved Problem 3.1.)
Soon after the United States revealed the discovery of a single mad cow in December 2003, more than 40 countries slapped an embargo on U.S. beef. In addition, some U.S. consumers stopped eating
Are predictions using the supply-and-demand model likely to be reliable in each of the following markets? Why or why not?a. Applesb. Convenience storesc. Electronic games (a market dominated by three
An increase in the minimum wage could raise the total wage payment, W = wL(w), where w is the minimum wage and L(w) is the demand function for labor, despite the fall in demand for labor services.
Usury laws place a ceiling on interest rates that lenders such as banks can charge borrowers. Lowincome households in states with usury laws have significantly lower levels of consumer credit
The Thai government actively intervenes in markets (Limsamarnphun, Nophakhun, “Govt Imposes Price Controls in Response to Complaints,” The Nation, May 12, 2012).a. The government increased the
After Hurricane Katrina damaged a substantial portion of the nation’s oil-refining capacity in 2005, the price of gasoline shot up around the country. In 2006, many state and federal elected
Use calculus to show that an increase in a specific sales tax τ reduces quantity less and tax revenue more, the less elastic the demand curve. (Hint: The quantity demanded depends on its price,
A subsidy is a negative tax through which the government gives people money instead of taking it from them. If the government applied a $1.05 specific subsidy instead of a specific tax in Figure
Green et al. (2005) estimate that for almonds, the demand elasticity is -0.47 and the long-run supply elasticity is 12.0. The corresponding elasticities are -0.68 and 0.73 for cotton and -0.26 and
Essentially none of the savings from removing the federal ad valorem tax were passed on to consumers for motion picture admissions and club dues(Brownlee and Perry, 1967; see Exercise 6.2). List the
On July 1, 1965, the federal ad valorem taxes on many goods and services were eliminated. Comparing prices before and after this change, we can determine how much the price fell in response to the
What effect does a $1 specific tax have on equilibrium price and quantity, and what is the incidence on consumers, if the following is true:a. The demand curve is perfectly inelastic.b. The demand
Solved Problem 2.4 claims that a new war in the Persian Gulf could shift the world oil supply curve to the left by 3 million barrels a day or more, causing the world price of oil to soar regardless
Show that the supply elasticity of a linear supply curve that cuts the price axis is greater than 1 (elastic), and the coefficient of elasticity of any linear supply curve that cuts the quantity axis
Calculate the price and cross-price elasticities of demand for coconut oil. The coconut oil demand function (Buschena and Perloff, 1991) is Q = 1,200 - 9.5p + 16.2pp + 0.2Y, where Q is the quantity
In a commentary piece on the rising cost of health insurance (“Healthy, Wealthy, and Wise,” Wall Street Journal, May 4, 2004, A20), economists John Cogan, Glenn Hubbard, and Daniel Kessler
Keeler et al. (2004) estimate that the U.S. Tobacco Settlement between major tobacco companies and 46 states caused the price of cigarettes to jump by 45¢ per pack (21%) and overall per capita
According to Borjas (2003), immigration to the United States increased the labor supply of working men by 11.0% from 1980 to 2000, and reduced the wage of the average native worker by 3.2%. From
When the U.S. government announced that a domestic mad cow was found in December 2003, analysts estimated that domestic supplies would increase in the short run by 10.4% as many other countries
In the application “Aggregating the Demand for Broadband Service” (based on Duffy-Deno, 2003), the demand function is Qs = 5.97p-0.563 for small firms and Ql = 8.77p-0.296 for larger ones. As the
Calculate the elasticity of demand, if the demand function isa. Q = 120 - 2p + 4Y, at the point where p = 10, Q = 20,b. Q = 10p-2. (Hint: See Solved Problem 2.2.) M
The U.S. Tobacco Settlement Agreement between the major tobacco companies and 46 states caused the price of cigarettes to jump 45¢ (21%) in November 1998. Levy and Meara (2006) find only a 2.65%drop
Suppose the demand function for carpenters is Q = 100 - w, and the supply curve is Q = 10 + 2w - T, where Q is the number of carpenters, w is the wage, and T is the test score required to pass the
Given the answer to Exercise 2.3, what effect does a U.S. quota on steel of Q 7 0 have on the equilibrium in the U.S. steel market? (Hint: The answer depends on whether the quota binds: is low enough
Lewit and Coate (1982) estimated that the price elasticity of demand for cigarettes is -0.42. Suppose that the daily market demand for cigarettes in New York City is Q = 20,000p-0.42 and that the
Due to a recession that lowered incomes, the 2008 market prices for last-minute rentals of U.S. beachfront properties were lower than usual. Suppose that the inverse demand function for renting a
Using calculus, determine the effect of an increase in the price of beef, pb, from $4 to $4.60 on the equilibrium price and quantity in the Canadian pork example. (Hint: Conduct an analysis that
The supply function is Q = 20 + 3p - 20r, and the demand function is Q = 220 - 2p, where r is the rental cost of capital. How do the equilibrium price and quantity vary with r? (Hint: See Solved
Ethanol, a fuel, is made from corn. Ethanol production increased more than 8.5 times from 1,630 million gallons in 2000 to 13,900 million gallons in 2011 (www.ethanolrfa.org/pages/statistics). Use a
The 9/11 terrorist attacks caused the U.S. airline travel demand curve to shift left by an estimated 30% (Ito and Lee, 2005). Use a supply-anddemand diagram to show the likely effect on price and
If the demand function is Q = 110 - 20p, and the supply function is Q = 20 + 10p, what are the equilibrium price and quantity? M*3.3 Green, Howitt, and Russo (2005) estimate the supply and demand
If the U.S. supply function of corn is Qa = 10 + 10p and the supply function of the rest of the world is Qr = 5 + 20p, what is the world supply function?*2.3 Between 1971 and 2006, the United States
Given the pork supply function in Equation 2.6, how does the supply function that is only a function of price, Equation 2.7, change if the price of hogs doubles to $3 per kg? M
In the application “Aggregating the Demand for Broadband Service” (based on Duffy-Deno, 2003), the demand function is Qs = 5.97p-0.563 for small firms and Ql = 8.77p-0.296 for larger firms, where
Suppose that the inverse demand function (where the demand curve is rearranged so that price is a function of quantity) for movies is p = 120 - Q1 for college students and p = 120 - 2Q2 for other
Using the estimated demand function for processed pork in Canada, Equation 2.2, show how the quantity demanded, Q, at a given price changes as per capita income, Y, increases slightly (that is,
Teachers often disagree when it comes to their grading philosophies. Some contend that the fair way to grade is to put significant weight on the effort put in by a student. Others say that fairness
Morissa is a 16 year old triplet. She argues that “fairness” means that she should be given the same opportunities and material goods as her two brothers. Her parents argue that “fairness”
Carl Icahn, an infamous corporate “raider,” wants to buy Commercial Metals Company and combine parts of it with various metal recycling businesses that he already owns. He has offered to buy
Richer countries often try to improve the welfare of children and “exploited”workers in less well-developed countries by urging their governments to enforce child-labor and minimum-wage laws. Do
The Kyoto Agreement, which the United States has not signed, requires that wealthier countries reduce their air pollution emissions by a far higher percentage than less well-developed countries. The
Costa Rica runs a trade deficit with its trading partner, the United States. This means that Costa Ricans buy more goods from U.S. suppliers than Americans purchase from Costa Rican suppliers. The
Using the Rawlsian concept of justice, explain why there are richer government entitlement programs in Norway and Iceland than in the United States(Hint: Is there any reason to believe that behind
If a family receives $145 in food stamps each month to purchase food, will the family end up spending $145 more on food each month? Why or why not.Explain your answer.
Suppose you decide to major in engineering and subsequently experience“a boom or a bust” in your earnings. Sometimes you are flush with job offers and high-wage opportunities, and at other times
In the United States, a very strong relationship exists between poverty and health status: poorer people tend to be unhealthier, and unhealthier people tend to be poorer. Explain why this is the case.
One of the ways in which global poverty can be alleviated is by outsourcing production from richer countries to less-developed countries. Another way is for wealthier countries to donate foreign aid
Suppose the government is faced with a budget crisis and must choose whether to cut funds from a program that supplements the income of the elderly or from a program that supplements the income of
There are several ways governments can reduce the costs that people incur as a result of market adjustments. A government can (1) provide a safety net that guarantees people’s basic needs are met;
In the United States, many government entitlement programs establish eligibility standards based on earning thresholds established by the U.S. Department of Health and Human Services. As the
Do you think that the availability of unemployment benefits affects the amount of time an unemployed person spends searching for a new job? If so, how? What other factors do you think have an impact
Studies have shown that when the government gets heavily involved in redistributing income to people at the bottom of the income distribution, the amount of private charity given for the same purpose
Berkeley (CA) Cares, a nonprofit charity, established one of the first programs in the United States to encourage people to give vouchers instead of money to local panhandlers. These vouchers, worth
Until 1992, there were only two comic book publishers—D.C. Comics and Marvel Comics. In 1992, Image Comics was created by a group of former Marvel artists. By 1994, Image accounted for 25 percent
Firms competing in the “big box super retailer” sector of the economy exhibit a great deal of interdependence in decision making. For example, Walmart expanded its grocery offerings to fresh
Using game theory and the concept of repeat games, explain why parents punish their oldest children more for engaging in risky behaviors (drinking, speeding, etc.) than their younger children when
Using a prisoners’ dilemma game-theory framework, show why it is always the dominant strategy for a professional baseball player to take performanceenhancing steroids. How, if at all, would your
The largest automakers in the United States are often the biggest buyers of new tires each year. However, during the 2007 Great Recession, tire manufacturers sold more tires directly to car owners
Most government agencies solicit bids for contracts to provide goods and services to government entities. Examples include food services for the U.S. military, transportation services for government
Employees—who are suppliers of labor—will sometimes collude with each other to call in sick or walk off their jobs if they are not given a raise or enhanced benefits. This often occurs in
Using a game-theory approach and the concept of repeat games, can you explain why more American League batters get “beaned” by pitchers than National League batters? (Hint: The American League
Sunkist, Inc. is a not-for-profit marketing cooperative that processes and markets the collective output of more than 6,000 citrus growers in California and Arizona. It is the largest supplier of
The following table is a payoff matrix for the two major league baseball teams in Southern California: the L.A. Dodgers and the Anaheim Angels. It indicates the payoff to each team resulting from its
The beer industry is comprised of a small number of large, international brewers.Over the past decade or two, many local microbreweries have entered the market.Do you think that this has increased
In the early decades of the airline industry, the CAB (Civil Aeronautics Board)set the fares for all airline routes and assigned these routes to the airlines. The routes with the greatest
A common complaint in business is “cutthroat competition” (also known as predatory pricing) where a competitor supposedly cuts price below its rivals’ costs to drive them out of business. Under
Some cartels have been known to survive and operate effectively for long periods of time; others have fallen apart in relatively short order. Economists believe they know something about the various
Medicare, the federal medical insurance program for the over-65 population, is the predominant purchaser of medical services in the United States. It pays urban teaching hospitals a higher amount
Using a diagram for a typical monopsonist, indicate the deadweight loss that results from having just one buyer in a market.
Instead of rewarding innovation through a patent system, which creates monopolies, some economists suggest that the government should subsidize research and development and/or give cash “prizes”
Economists sometimes talk about a “second-best world” in which a market is dominated by one seller (monopolist) and one buyer (monopsonist). This is called a bilateral monopoly. Show this
Suppose that a major movie theater chain is about to debut a highly anticipated film. It faces two sets of demand curves—one for tickets in New York City and the other for tickets in a “sleepy”
In 1949, the American Can Company—a producer of can-closing equipment—was prohibited by the U.S. government from continuing its practice of leasing its equipment and requiring lessees to also buy
In the 1960s, one of the rationales offered for regulating the airfares and routes of airlines (or creating a public airline monopoly like Air France) was that the industry was a natural monopoly. Do
Another monopoly client is charging $12 per unit of output and selling 4,000 units of output. Its marginal cost of production is $6 a unit and marginal revenue is two-thirds of its price. Should the
You have been hired by a monopolist to confirm whether it is producing at the profit-maximizing level of output. You observe that it is collecting $12,000 in revenue by selling 2,000 units of output.
Explain why the marginal cost curve can never intersect the marginal revenue curve in the inelastic portion of a monopolist’s demand curve.
True, False, or Uncertain. As with a competitive firm, a monopoly’s short-run supply curve will be the portion of its marginal cost curve that sits above its average variable cost curve. Explain
Suppose that the government placed a price ceiling on a monopolist. Will this have the same impact on the quantity produced as it would if the market were competitive? Explain your answer.
Contrast the short-run and long-run impact of a per unit tax on a competitive industry versus a monopoly. Under which scenario (competition or monopoly)will consumers bear the greatest share of the
(1) Many major airlines have employee travel cards that permit employees to fly“space available” (i.e., no reservations allowed) at substantial discounts.(2) Local theaters often have a
Suppose that due to prohibitively high import tariffs, U.S. steelmakers have a virtual monopoly in their home (U.S.) market. Show how they (together) would set price in this home market if (a) they
A single buyer in a market (a monopsonist) faces an upward-sloping supply curve given by P 40 10Q. Graph the supply curve and the curve representing the marginal factor cost of buying an
Some local municipal governments provide trash collection for their residents;others license a number of private waste-collection companies that can then privately solicit business from these
There has been a recent uptick in the number of young people in France who are jumping barriers to ride the public Metro subway system without buying a ticket.They argue that free transportation
China has been loudly criticized by various U.S. and European industries (such as the rolled-steel and candle-making industries) for subsidizing Chinese producers to such an extent that they can
Economists are proud of the fact that prices act as virtually costless signals to consumers and producers about how to allocate their scarce resources. In effect, prices “ration” these scarce
To combat teenage obesity, Congress has proposed a tax on sugared sodas and other sugared drinks.a) Using two graphs—one for the sugared soda market and another for a typical soda producer—show

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