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microeconomics principles

Questions and Answers of Microeconomics Principles

For the first five years after Apple introduced the iPhone, Apple sold it in the United States with the requirement that it be used only on the AT&T cell phone network. Indeed, Apple took a
Compare the equilibrium quantity and price in two markets: one in which a firm is both a monopsony and a monopoly and one in which the firm buys inputs competitively but has a monopoly in the output
Apple sold its iPhone to AT&T, which in turn sold it to the final consumers. Suppose that the consumers’ constant elasticity demand function for the iPhone was Q = Ap-ε , Apple’s marginal
The U.S. Department of Justice (DOJ) accused Apple and five publishers of colluding to fix ebook prices, which Apple wanted to sell for viewing on its iPad. The publishers settled with the DOJ and
Compare welfare in a market where a firm is both a monopsony and a monopoly to welfare in markets in which the firm has a monopsony in the input market but acts as a price taker in the output market.
By 2015, Apple, Google, Pixar, and other firms settle a U.S. Department of Justice lawsuit that alleged they had a cartel agreement that barred them from soliciting each other’s employees.
Humphreys and Pyun (2016) estimated that (MRP - salary)/MRP = 0.89 for rookie major league baseball players, while the comparable figure for players who are eligible to be free agents is 0.21.
Some past and current civilizations, believing that interest should not be charged, passed usury laws forbidding it. What are the private and social benefits or costs of allowing interest to be
You have a barrel of oil that you can sell 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
If the government bars foreign lenders from loaning money to its citizens, how does the capital market equilibrium change?
What is the effect of a usury law that limits the market interest rate if some potential lenders, hoping that the authorities do not catch them, are still willing to loan money at illegally high
In the figure in Solved Problem 16.4, suppose that the government’s demand curve remains constant at D1g but the government starts to tax private earnings, collecting 1% of all interest earnings.
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?
Firms are increasingly offering retiring employees a choice of whether to take a lump-sum payment now or receive monthly payments for the rest of their lives
What is the present value of $100 paid a year from now and another $100 paid two years from now if the interest rate is i?
What is the present value of a stream of payments of f per year for t years that starts T years from now if the interest rate is i?
As a resident of New York City, you are considering purchasing a new Toyota Prius. The Prius sells for $20,000. Your annual expense of owning and driving the car is $3,000 (most of which is the cost
How much money do you have to put into a bank account that pays 10% interest compounded annually to receive annual payments of $200 forever?
Horizon Ford advertises that it will sell you a Taurus for $24,000 or lease it to you. To lease it, you must make a down payment of $3,000 and agree to pay $3,000 at the end of each of the next two
Lewis Wolff and his investment group bought the Oakland A’s baseball team for $180 million in 2005. Forbes magazine estimated that the team’s net income for that year was $5.9 million. If the new
How much money do you have to put into a bank account that pays 10% interest compounded annually to receive perpetual annual payments of $200 in today’s dollars if the rate of inflation is 5%?
You rent an apartment for two years. You owe a payment of f today and another equal nominal payment next year. If the inflation rate is g and the real interest rate is i, what is the present value of
To virtually everyone’s surprise, the new Washington Nationals baseball team earned a pre-tax profit of $20 million in 2005, compared to a $10 million loss when the team was the Montreal Expos in
If you spend $4 a day on a latte (in real dollars) for the rest of your life (essentially forever), what is your present discounted value at a 3% interest rate?
According to Forbes, a typical National Basketball Association (NBA) franchise would sell for $372 million—though the Knicks were worth $600 million in 2007. NBA teams posted average earnings
You win a lottery. Your prize is either two annual payments of $50,000 at the end of each year or a lump-sum payment of $87,000 today. You expect the rate of inflation to be 5% and the real interest
A group that includes former Lakers star Magic Johnson bought the Los Angeles Dodgers for $2.15 billion in 2012. The Dodgers reported earnings of $11.3 million (John Gittelsohn and Nadja Brandt,
A firm’s profit is π = revenue - labor costs - capital costs. Its capital cost can be stated as its internal rate of return on capital, irr, times the value of its capital, pKK, where pK is the
According to the Associated Press, in 2015, Max Scherzer became the highest-paid right-handed pitcher in major league history by agreeing to a “$210 million, seven-year contract” with the
Tiffany plans to sell pies that she will buy this evening at a street fair tomorrow. If the weather is nice, she will earn $200; however, if it rains, she will lose $60, the amount she would pay for
Suppose that Laura’s utility function is U(W) = W0.5, where W is wealth. Is she risk averse? Show mathematically.
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
Because a state’s governor can substantially influence new laws, uncertainty about the outcome of a gubernatorial election may affect whether firms make new investments. Shelton and Falk (2016)
Farrell et al. (2000) estimated that the elasticity of demand for lottery tickets is about -1. If the U.K. National Lottery is running its game to make money (it gets a percentage of the total
In the paper market example in this chapter, what are the optimal emissions fee and the optimal tax on output (assuming that only a single, constant fee or tax is applied)?
Suppose that the buyers in the previous question incur a transaction cost of $800 to purchase a car. This transaction cost is the value of their time to find a car. What is the equilibrium? Is it
In Solved Problem 20.5, a firm calculated the optimal level of monitoring to prevent stealing. If G = $500 and θ = 20%, what is the minimum bond that deters stealing?
The Challenge points out that if a ball club raises a player’s salary, it increases its fixed cost but not its variable cost. Use a figure to show what effect such an increase has if (a) The firm
What does a competitive firm’s labor demand curve look like at quantities of labor such that the marginal product of labor is negative? Why?
Suppose that Question 1.4 were modified so that GM has no subsidy but does have a head start over Toyota and can move first. What is the Nash equilibrium? Explain.Question 1.4 GM Enter Do Not Enter
In the Application “Strategic Advertising,” would the cola advertising or cigarette advertising game be an example of a prisoners’ dilemma game?
Most major electric car manufacturers belong to two rival camps. Each group uses one of two incompatible technologies to charge their cars at recharging stations (similar to gas stations). Both
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?
How does your analysis in the previous question change if the government imposes a lump-sum franchise tax of 40 on each firm (that is, the payoffs in the matrix are all reduced by 40). Now explain
Draw a figure to illustrate the Intel-AMD Nash-Cournot equilibrium in Solved Problem 13.2. At what quantities do the best-response functions hit the axes?
How would the Intel-AMD equilibrium in Solved Problem 13.2 change if AMD faced the same demand function as Intel, Equation 13.10?Equation 13.10pI = 490 - 10qI - 6qA
Why do prices increase if oligopolistic firms differentiate their products?
Various firms use marketing to differentiate their bottles of water (see the Application “Bottled Water”). If the firms in this market engage in a Bertrand game, what is the effect of this
Two pizza parlors are located within a few feet of each other on the Avenue of the Americas in New York City. Both were selling a slice of pizza for $1 (Matt Flegenheimer, “$1 Pizza Slice Is Back
Zipcar (now owned by Avis) initiated the business of renting cars by the hour and is still the industry leader. However, car2go (owned by Daimler), Enterprise Car Share, and Hertz 24/7 have more
How would the airlines€™ Nash-Cournot equilibrium (Figure 13.3) change if United€™s marginal cost was $100 and American€™s was $200?Figure 13.3 192 Amorcarts
Lee et al. (2010) estimated that a 2009 tax of 10 New Taiwan Dollars ($0.30) per pack of cigarettes reduced Taiwanese cigarette consumption by 13.19%. Assuming that the market consists of two
The Federation of Quebec Maple Syrup Producers supplies over three-quarters of the world€™s maple syrup (see the Application €œCheating on the Maple Syrup Cartel€).
If two quantity-setting firms act simultaneously, is the Stackelberg outcome likely? Why or why not?
In their study of cigarette advertising, Roberts and Samuelson (1988) found that the advertising of a particular brand affects overall market demand for cigarettes but does not affect the brand’s
In 2010 and 2011, the U.S. government gave incentives to new businesses. A new firm could write off $10,000 in start-up costs, they could write off new capital investment, investors who invested in
What is the duopoly Nash-Cournot equilibrium if the market demand function is Q = 1,000 - 1,000p, and each firm’s marginal cost is $0.28 per unit?
Holding the number of firms in the market fixed, what happens to the price as the number of noncartel members rises? Why?
Using our duopoly airlines example, (falsely) assume that the corporation that owns United Airlines is located in one country and American’s is located in another.a. If only United’s government
On June 26, 2016, Hertz charged $88 to rent a Chevy Spark for one day in New York City, but only $29 a day in Miami. Is this price discrimination? Explain.
Warner Home Entertainment sold the Harry Potter and the Prisoner of Azkaban two-DVD movie set around the world. Warner charged 33% more in Canada and 66% more in Japan than in the United States,
A copyright gave Universal Studios the legal monopoly to produce and sell the Mama Mia! DVD. The DVD sold for $20 in the United States and $36 (£22) in the United Kingdom. I estimate that the
Ticketmaster Corp. uses an Internet auction to sell tickets (http://www.ticketmaster.com/ticketauctions). Is it engaging in price discrimination? If so, what type?
A monopoly’s inverse demand function is p = 800 - 4Q + 0.2A0.5, where Q is its quantity, p is its price, and A is the level of advertising. Its marginal cost of production is 2, and its cost for a
How would the answers to Solved Problem 12.1 and Table 12.1 change if seniors€™ reservation price was $2.50?Table 12.1 (a) No Extra Customers from Price Discrimination Profit from 10 Profit
Can Table 12.1 be modified so that the movie theater in Solved Problem 12.1 does not earn more by perfectly price discriminating than from charging a single price? What changes to the table would
Many television and radio stations broadcast O. J. Simpson€™s 1995 trial for murder. Viewership of other programs and sales sagged as viewers skipped program length product pitches to watch
Explain why charging a higher or lower price than p = 10 reduces the monopoly€™s profit in Figure 12.5. Show the monopoly€™s profit if p = 20 and compare it to its profit if p =
Explain why in Table 12.2 the firm does not use mixed bundling.Table 12.2 Wond Pracessur Spreadsbeet Hundle Alisha $120 $50 $170 Bob Profit-maximizing price Units sold $90 $70 $160 $50 $160 $90
In our discussion of Figure 12.4, we assumed that the monopoly engaged in block-pricing by setting both block prices so that they were on the demand curve. However, suppose the monopoly sets the
Explain how a monopoly firm can price discriminate by advertising sales in newspapers or magazines that only some of its customers see. Is it a noisy monopoly?
In Solved Problem 18.3, suppose that the firms will split the cost of a guard if they both vote to hire one. Show the new payoff matrix. Do they hire a guard?
Countries around the world provide consumers with fossil fuel subsidies (Coady et al., 2016). In 2015, the subsidies reached $5.3 trillion (6.5% of global gross domestic product). Davis (2016)
Every dollar of collective advertising by the beef industry results in $5.67 in additional marginal revenue for producers (as discussed in the Application “What’s Their Beef?”). Is the industry
Northern Victoria, Australia, imposed a vomit tax on pubs in the Greater Shepparton area that remain open between 3:00 a.m. and 6:00 a.m. The tax was to be used to pay for cleaning up the mess left
Patent trolls are firms that buy patents hoping to bring patent infringement lawsuits against major firms rather than to producing goods themselves. Recently, 53 firms such as Google, Microsoft, Ford
A pandemic influenza (akin to the severe 1918 flu epidemic) that kills 2 million or more people could also cause annual income loss of 4% to 5% of global national income (see Fan et al., 2016). Using
Using the numerical example in Appendix 18A, determine the social optimum if the marginal harm of gunk is MCg = $84 (instead of Equation 18A.3). Can you think of a shortcut that would allow you to
Half of the existing Florida manatees have made a startling discovery: the warm water pouring out of power plants makes an excellent winter refuge. The warm water prevents them from dying from cold
In Figure 18.1, could the government use a price ceiling or a price floor to achieve the optimal level of production?Figure 18.1
More than four times as many antibiotics are used to promote growth and prevent disease in animals than for human use (Teillant and Laxminarayan, 2015). The extensive use of antibiotics in livestock
In the example in Table 18.2, suppose that the two parties cannot negotiate. The government imposes a tax on the auto body shop equal to the marginal harm it does to the tea house. What is that tax
Jack and Jill live in different cities. Regardless of which one chooses to fly to visit the other, they agree to split the cost of the flight equally. What is the implication of this fee-sharing
Patrick, the owner, makes the same offer to the manager at each of his stores: “At the end of the year, pay me a lump-sum of $100,000, and you can keep any additional profit.” Astrid, a manager
A publication of a major clinical trial showed that a common knee operation does not improve outcomes for patients with osteoarthritis. Howard et al. (2016) examined all these operations in Florida
In the contract choice example in the chapter, what are the implications for risk bearing of the fixed-fee and contingent contract if the sales revenue varies with market conditions? Will a
List as many ways as possible that a principal can reassure an agent that it will avoid opportunistic behavior.
In Solved Problem 19.2, would any of the firms produce high-quality wallets if the cost of producing a higher-quality wallet is only $11? Explain.
In Solved Problem 19.2, show that, if all the other firms were producing a high-quality wallet, it would pay a firm to start producing a low-quality wallet.
In the ability signaling model, suppose that firms can pay c* for a test that determines a worker’s ability. Does a firm benefit by testing workers?
Grocery stores, hotels, and other firms give their customers free loyalty cards. A customer who uses the card receives a discount. Are these firms signaling, screening, price discriminating, or
What are the answers to Solved Problem 19.1 if customers are willing to pay $10,000 for a good used car?
Some firms sell the same product under two brand names at different prices. For example, although the Chevy Tahoe and the GMC Yukon are virtually twins, the 2016 Yukon sells for $1,200 more than the
The Federal Trade Commission objected to the California Dental Association’s prohibitions against its members engaging in advertising about prices, calling them restraints on trade. What effect
The Application “Reducing Consumers’ Information” notes that a food manufacturer may sell a national brand product for more than an identical private-label product. Is the firm a noisy monopoly
Can you change the payoffs in the table in the Challenge Solution so that the firms choose to invest in safety? Explain.
As of 2016, the pharmaceutical companies Abbott Laboratories, AstraZeneca, Aventis Pharmaceuticals, Bristol-Myers Squibb Company, Eli Lilly, GlaxoSmithKline, Janssen, Johnson & Johnson, Novartis,
The demand curve Q = A/p, where A is a positive constant, has the property that the elasticity of demand is ε = -1 everywhere.a. Use math to show that the revenue is the same at any given point on
A demand curve Q = A/p, where A is a positive constant, has the property that the elasticity of demand is ε = -1. Accurately draw this demand curve. Now pick two different prices and show the
In a figure, show the effect of an ad valorem tax (see Chapter 2) on a monopoly optimum, consumer surplus, producer surplus, welfare, and dead-weight loss.

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