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microeconomics principles

Questions and Answers of Microeconomics Principles

According to one estimate, the parts for a Segway Human Transporter—which has five gyroscopes, two tilt sensors, dual redundant motors, ten microprocessors, and can travel up to 12.5 mph—cost at
In 2013, the Oakland A’s were one of the hottest teams in baseball. They were regularly drawing “sellout” crowds, with many more fans wanting tickets. However, the A’s decided not sell all of
A monopoly manufactures its product in two factories with marginal cost functions MC1(Q1) and MC2(Q2), where Q1 is the quantity produced in the first factory and Q2 is the quantity manufactured in
Show that a monopoly will not necessarily lower its price by the same percentage as its constant marginal cost drops.
Water bottles are the best-selling item in airport stores. In many airports, the price charged is whatever the market will bear. However, some airports limit the price. San Francisco International
If the linear inverse demand function is p = 100 - 2Q, what is the marginal revenue function? Draw the demand and marginal revenue curves.
For years, Buffalo wings, barbequed chicken wings, have been popular at bars and restaurants, especially during football season. Now, restaurants across the country are selling boneless wings, a
If Jane and Denise have identical, linear production possibility frontiers, can they benefit by trading? Why?
Modify the figure in the Challenge Solution to show how much would be sold in both sectors in the absence of anti price gouging laws. Discuss how these quantities differ from those that result from
Use a figure to illustrate why technological progress (which causes the supply curve to shift rightward) hurts the government and consumers in an agricultural market in which the government maintains
The Canadian government imposes a quota on the amount of milk that firms may produce. What are the effects on consumer surplus, producer surplus, and welfare? Who benefits from such a rule?
At the unregulated, competitive equilibrium, the demand curve of gasoline becomes more elastic over time as people can react to a higher gasoline price by buying more fuel-efficient cars, moving
Oil companies heavily lobby some members of Congress, encouraging them to support laws that benefit these producers. Other more populist members of Congress advocate laws that benefit
Use diagrams to compare the welfare implications of the traditional agricultural price support program and the deficiency payment program if both set the same price floor, p. Under what circumstances
In Solved Problem 9.4, what is the relationship between lost consumer surplus due to the tax, deadweight loss, and tax revenue? Discuss and reconcile the different results in Solved Problems 9.1 and
In the first quarter of 2013, the world price for raw sugar, 23¢ per pound, was about 79% of the domestic price, 29¢ per pound, because of quotas and tariffs on sugar imports. Consequently,
How would the analysis in Solved Problem 9.4 change if the supply curve were upward-sloping instead of horizontal?
In 2013, the United States accused India, China, and three other Asian countries of dumping shrimp in the United States at prices below their costs, and proposed duties (tariffs) as high as 62.74%
If the supply function is Q = 10 + p, what is the producer surplus if price is 20?
The Application “What’s a Name Worth?” notes that a successful entertainer such as Taylor Swift earns astronomical amounts. Other entertainers earn just a relatively small wage. Discuss why
A city may limit the number of liquor licenses for restaurants in many ways. It could issue a license that the owner keeps forever and that can be resold.Or, it could charge a high license fee each
Does a firm’s producer surplus differ from its profit if it has no fixed cost?
A shock causes the demand curve to shift to the right. What properties of the market are likely to lead to a large increase in the equilibrium price?
Derive Equation 8.7. 1 - 0
Redraw Figure 8.11 to show what happens if factor costs fall as the industry€™s quantity increases. (a) Firm (b) Market мс мс AC2 D2 D' P2 E, 9, 92 q, Units per year Q, = n,9, Q2 = n292
If the pre-tax cost function for John’s Shoe Repair is C(q) = 100 + 10q - q2 + 1/3q3, and it faces a specific tax of t = 10, what condition determines the profit-maximizing output if the market
Draw a figure to illustrate why the size of ethanol processing plants has fallen in recent years (see “The Size of Ethanol Processing Plants” Application).
How would the answer to Solved Problem 8.2 change if, instead of a specific tax, Manitoba imposes an ad valorem tax (see Chapter 3) of v percent on lime produced in that province?
Based on Equation 8.2, by how much does the residual elasticity of demand facing a firm increase as the number of firms increases by one firm?
What is the long-run cost function if the production function is q = L + K?
Suppose in Solved Problem 7.2 that the government charges the firm a franchise tax each year (instead of only once). Describe the effect of this tax on the marginal cost, average variable cost,
A firm manufactures boxes of cereal using a fixed proportion production function: One box and one unit (12 ounces) of cereal produce one box of cereal. What is the expansion path? What is the cost
In 2015 the U.S. Supreme Court was hearing a case about a federal rule to promote reduced electricity use. In discussing this rule, Chief Justice John Roberts related the regulation to the pricing of
Platinum Pipeline Inc. needs a Caterpillar D6T dozer to install water and sewer lines. How does its fixed cost change if it can rent a dozer rather than buy one?
Use the tangency rule to determine the cost-minimizing bundles of labor and capital for a Japanese synthetic rubber firm’s production function q = L0.5K0.5 (Flath, 2011) where w = 10 and r = 10.
Using the information in Table 7.1, construct another table showing how a lump-sum franchise tax of $30 affects the various average cost curves of the firm.Table 7.1 Average Variable Cost, AVC = VC/q
Initially a firm’s wage is w = 10 and its rental cost of capital is r = 10. After its wage rate doubles, how do its isocost lines change?
Is a boss a fixed or variable input in the Application “A Good Boss Raises Productivity”? How does having a good boss affect the marginal product of labor curve for this firm? Assuming that the
Ben swims 50,000 yards per week in his practices.Given this amount of training, he will swim the 100-yard butterfly in 52.6 seconds and place tenth in a big upcoming meet. Ben’s coach calculates
Are the robots in the Application “Robots and the Food You Eat” an example of neutral, labor-saving, or capital-saving innovation? Explain.
Why do we expect the law of diminishing marginal returns to hold?
If the production function is q = f(L, K) = 3L + 2K, and capital is fixed at K̅ = 50, what is the short-run production function? What is the marginal product of labor?
How would the answer in the Challenge Solution change if we used the marginal product of labor rather than the average product of labor as our measure of labor productivity?
Vasco’s utility function is U = 10X2Z. The price of X is pX = $10, the price of Z is pz = $5, and his income is Y = $150. What is his optimal consumption bundle?
See the Application “Paying Employees to Relocate.” A firm transfers its employee Kiki to another country and agrees to pay her enough to buy the same bundle of goods as she currently buys. Kiki
Redraw Figure 5.4 using an equivalent variation rather than a compensating variation approach.Figure 5.4 40 30 20 10 -/1 12 16 24 30 40 60 T, Music tracks per quarter Income effect + Substitution
Derive the demand curve for pizza, Z, if Lisa’s utility function is U = Z0.25 B0.75, where B is burritos.
Suppose that Bill’s wage varies with the hours he works: w(H) = aH, a > 0. Show how the number of hours he chooses to work depends on his tastes.
Illustrate the effect of cheaper phones in the Philippines that is described in the Application €œSmoking Versus Eating and Phoning€ using a figure similar to Figure 5.1. (a)
Could an individual’s Engel curve be the mirror image of the one in the Application “Fast-Food Engel Curve” (quantity is first decreasing and then increasing with income)? Illustrate in a
Change Figure 5.5 so that L2is steeper than L1(but still goes through e1); that is, food increases by more than clothing in the second year. Show the conclusion that Klaas is still better off after
Using a figure similar to Figure 5.4 or that in Solved Problem 5.3, discuss the substitution, income, and total effects of a price change for Coke for Mahdu who views Coke and Pepsi as perfect
Using calculus, show that not all goods can be inferior. Start with the identity that y = p1q1 + p2q2 + c + pnqn
Alix views coffee and cream as perfect complements. In the first period, Alix picks an optimal bundle of coffee and cream, e1. In the second period, inflation occurs, the prices of coffee and cream
Cori insists on having three pieces of toast for every two eggs she eats for breakfast. What is her utility function? If the price of eggs increases but we compensate Cori to make her just as
Hugo views donuts and coffee as perfect complements:He always eats one donut with a cup of coffee and will not eat a donut without coffee or drink coffee without a donut. Derive and plot Hugo’s
In Figure 5.1, how does Mimi’s utility at E1 on D1 compare to that at E2? As we move down from the highest point on an individual’s downward-sloping demand curve, must the individual’s
During his first year at school, Ximing buys eight new college textbooks at a cost of $50 each. Used books cost $30 each. When the bookstore announces a 20% price increase in new texts and a 10%
Steve’s utility function is U = BC, where B = veggie burgers per week and C = packs of cigarettes per week. Here, MUB = C and MUC = B. What is his marginal rate of substitution if veggie burgers
Draw diagrams similar to Figure 5.1 showing that the price consumption curve can be horizontal or downward sloping.Figure 5.1 (a) Indiffe rence Curves and Budget Constraints 12.0 Price-consumption
Governments generally limit the amount of the childcare subsidy. For example, in Washington State, the 2015 maximum subsidy for an infant is $31.47 per day. A binding limit on the subsidy creates a
Michelle spends all her money on food and clothing. When the price of clothing decreases, she buys more clothing.a. Does the substitution effect cause her to buy more or less clothing? Explain. (If
In Solved Problem 4.5, if the generic bleach increases its strength to equal that of Clorox without changing its price, what bundles will Chris buy if the price of Clorox is $3 or $2?
Is a wealthy person more likely than a poor person to prefer to receive a government payment of $100 in cash to $100 worth of food stamps? Why or why not?
Show how much an individual’s opportunity set increases if the government gives food stamps for free rather than sells them at subsidized rates.
Since 1979, the government has given recipients food stamps for free. Before 1979, people bought food stamps at a subsidized rate. For example, to get $1 worth of food stamps, a household paid about
A poor person who has an income of $1,000 receives $100 worth of food stamps. Draw the budget constraint if the food stamp recipient can sell these coupons on the black market for less than their
Crost and Guerrero (2012) found that when women turn 21, their cost of buying alcohol drops, and they reduce their consumption of marijuana by 17% (see the Application “Substituting Alcohol for
Maureen only drinks a cup of coffee with one teaspoon of sugar. In a figure, show the bundle of coffee and sugar that gives her the most pleasure. Are her indifference curve and the budget line
Salvo and Huse (2013) found that roughly one fifth of owners of flexible-fuel cars (which can run on a mix of ethanol and gasoline) choose gasoline when the price of gas is 20% above that of ethanol
Felix chooses between water and all other goods. If he spends all his money on water, he can buy 12 thousand gallons per week. At current prices, his optimal bundle is e1. Show e1 in a diagram.
Diogo has a utility function U(B, Z) = ABαZβ, where A, α, and β are constants, B is burritos, and Z is pizzas. If the price of burritos, pB, is $2 and the price of pizzas, pZ, is $1, and Y is
José Maria’s utility function is U(B, Z) = ABαZβ. What is his marginal utility of B? What is his marginal utility of Z? What is his marginal rate of substitution between B and Z?
David’s utility function is U = B + 2Z, so MUB = 1 and MUZ = 2. Describe the location of his optimal bundle (if possible) in terms of the relative prices of B and Z.
Julia consumes cans of anchovies, A, and boxes of biscuits, B. Each of her indifference curves reflects strictly diminishing marginal rates of substitution.Where A = 2 and B = 2, her marginal rate of
If Joe views two candy bars and one piece of cake as perfect substitutes, what is his marginal rate of substitution between candy bars and cake?
What is the effect of a quota of 13 thousand gallons of water per month on the opportunity set of the consumer in Solved Problem 4.2?
Does the utility function V(Z, B) = α + [U(Z, B)]2 give the same ordering of bundles as does U(Z, B)?
What happens to a consumer’s optimum if all prices and income double?
Suppose Gregg consumes chocolate candy bars and oranges. He is given four chocolate bars and three oranges. He can buy or sell a candy bar for $2 each. Similarly, he can buy or sell an orange for $1.
For a tax on sugar or fat to reduce the consumption of fattening foods and drinks by a very large amount, what must the demand and supply elasticities be?
Cranfield (2012) estimated that the elasticity of demand for Canadian beef was -0.83. If the supply curve of beef is nearly inelastic in the short run and a change in the law causes the supply curve
A 2014 report from the Motion Picture Association of America said that revenue rose to $10.9 billion in 2013 from $10.8 billion in 2012 even though the number of tickets sold fell from 1.36 billion
In the figure in the Application €œAmazon Prime,€ what do the areas A, A + B, A + C, and B - C represent?Amazon Prime 99 C = $0.36 billion 79 e, B= $0.158 billion A = $.1422
If the inverse demand function is p = a - bQ and the inverse supply function is p = c + dQ, show that the incidence of a specific tax of t per unit falling on consumers is b/(b + d) = η/(η - ε ).
What is the effect of a $1 specific tax on equilibrium price and quantity if demand is perfectly elastic and supply is perfectly inelastic?What is the incidence on consumers? Explain.
What is the effect of a $1 specific tax on equilibrium price and quantity if supply is perfectly inelastic? What is the incidence on consumers? Explain.
What is the effect of a $1 specific tax on equilibrium price and quantity if demand is perfectly elastic? What is the incidence on consumers? Explain.
If the demand elasticity is -1 at the initial equilibrium and price increases by 1%, by how much does revenue change?
What is the effect of a $1 specific tax on equilibrium price and quantity if demand is perfectly inelastic? What is the incidence on consumers? Explain.
A constant elasticity supply curve, Q = Bpη, intersects a constant elasticity demand curve, Q = Apε , where A, B, η, and ε are constants. What is the incidence of a $1 specific tax? Does your
Use math to show that, as the supply curve at the equilibrium becomes nearly perfectly elastic, the entire incidence of the tax falls on consumers.
In 2012, the governors of several livestock–producing states asked the U.S. Environmental Protection Agency (EPA) to suspend federal ethanol mandates due to a major drought (Amanda Peterka, “EPA
Duffy-Deno (2003) estimated that the demand function for broadband service was Qs = 15.6p-0.563 for small firms and Ql = 16.0p-0.296 for larger ones. These two demand functions cross. What can you
Use calculus to prove that the elasticity of demand is a constant ε everywhere along the demand curve whose demand function is Q = Apε .
In early 2010, the U.S. government offered an $8,000 subsidy to new homebuyers. What effect does a per-house subsidy have on the equilibrium price and quantity of the housing market? What is the
Cranfield (2012) estimated that the demand elasticities were -0.83, -0.61, and -0.76 for Canadian beef, chicken, and pork, respectively. Are these demand elasticities elastic or inelastic? Which
Governments often use a sales tax to raise tax revenue, which is the tax per unit times the quantity sold. All else the same, will a specific tax raise more tax revenue if the demand curve is
Will Mexico stop producing tequila? Because of record-low industry prices for the agave azul plant, from which tequila is distilled, farmers in Jalisco and other Mexican states are switching to more
Gillen and Hasheminia (2013) estimate that the elasticity of demand for air travel is -0.17 for people traveling alone and -3.09 for couples. Are these demand elasticities elastic or inelastic? Which

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