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business
modern principles of economics

Questions and Answers of Modern Principles Of Economics

1.For each of the following, decide whether you agree or disagree and explain your answer:a. A firm earning positive profits in the short run always has an incentive to increase its scale of
1.2. Who is the woman in the coat? Recently, one of the authors of this textbook was walking in Central Park in New York City. Because it was lunchtime and she was hungry, she decided to indulge her
1.1. Show on a graph how a higher-priced license increases hot dog prices. Recently, one of the authors of this textbook was walking in Central Park in New York City. Because it was lunchtime and she
1.1. Some have argued that even if long-run AC curves do eventually slope up, we would not likely see many firms operating at this size. Why not?
1.1. If you were only concerned about the cost side of education, where do you think you would find the biggest opportunities for cost saving with size?
1.1. Google was an early pioneer in the search business. How did that early lead interact with the fact of scale economies in Google’s favor?
10. Tracy Chapman’s song “Fast Car” reminds us how difficult it is to escape poverty. Identify the reasons in the song that keep Tracy trapped in poverty. (To listen to the song, visit
9. A number of very famous people (Ellen DeGeneres, Brad Pitt, Mark Zuckerberg, Bill Gates)all dropped out of college. Why would anyone drop out of college when college graduates typically make
8. The government is considering three possible welfare programs:a. Give each low-income household $10,000.b. Give each low-income household $20,000 minus the recipient’s income.c. Match the income
7. Suppose that a company has 10 employees.It agrees to pay each worker on the basis of productivity. The individual workers’ output is 10, 14, 15, 16, 18, 19, 21, 23, 25, and 30 units.However,
5. Suppose that a wealthy friend asks for your advice on how to reduce income inequality.Your friend wants to know if it would be better to give $100 million to poor people who will never attend
4. The United States has attracted many highly productive immigrants who work in fields such as education, health, and technology.How do these immigrants affect income inequality in the United
3. Consider two communities. In Middletown, two families earn $40,000 each, six families earn $50,000 each, and two earn $60,000 each. In Polarity, four families earn $10,000 each, two earn $50,000
2. Internships are considered a vital stepping-stone to full-time employment after college, but not all internship positions are paid. Why do some students take unpaid internships when they could be
1. Suppose that society restricted the economic opportunities of right-handed persons to jobs in construction, while left-handed persons can work any job.a. Would wages in construction be higher or
7. Which antipoverty program (welfare, in-kind transfers, or EITC) creates the strongest incentive for recipients to work? Why?
5. How does the degree of income inequality in the United States compare with that in similarly developed countries? How does U.S. income inequality compare with that in less developed nations?
4. Discuss some of the reasons why full-time working women make, on average, 82% as much as full-time working men.
13. Why are most iPhones manufactured and assembled in China and then shipped to the United States, even though Apple was founded in California and most of Apple’s workforce still reside in this
12. What country made the shirt you are wearing?Go ahead and check the tag and write down your answer. Even though we can’t predict the exact country your shirt is from, there is a surprising
11. Suppose that the current wage rate is $20 per hour, the rental rate of land is $10,000 per acre, and the rental rate of capital is $2,500.The manager of a firm determines that the value of the
10. What will happen to the equilibrium wage of crop harvesters in Dystopia if the price of the crop falls by 50% and the marginal product of the workers increases by 25%?
9. Farmers in Utopia experience perfect weather throughout the entire growing season, and as a result their crop is double its normal size. How will this bumper crop affect each of the following ?a.
8. A football team is trying to decide which of two running backs (A or B) to sign to a one-year contract.The team has done a statistical analysis to determine the value of each touchdown, yard
7. Illustrate each of the following changes with a labor supply and demand diagram. (Use a separate diagram for each part.) Diagram the new equilibrium point, and note how the wage and quantity of
5. In an effort to create a healthcare safety net, the government requires employers to provide healthcare coverage to all employees. What impact will this increased coverage have in the following
4. Jimi owns a music school that specializes in teaching guitar. Jimi has a limited supply of rooms for his instructors to use for lessons. As a result, each successive instructor adds less to
3. Pam’s Pretzels has a production function shown in the following table. It costs Pam’s Pretzels $80 per day per worker. Each pretzel sells for $3.Quantity of labor Quantity of pretzels 0 0 1
1. Maria is a hostess at a local restaurant. When she earned $8 per hour, she worked 35 hours per week. When her wage increased to$10 per hour, she decided to work 40 hours per week. However, when
9. How does outsourcing affect wages and employment in the short run and the long run?
7. If workers became more productive (that is, produced more output in the same amount of time), what would happen to the demand for labor, the wages of labor, and the number of workers employed?
11. On the TV show The Big Bang Theory, the characters have an interesting way of resolving disputes. Watch this link: www.youtube.com/watch?v=cSLeBKT7-sM. Is there a dominant strategy in
10. Two brands of coffee makers, Keurig and Tassimo, are vying for the convenience market.Keurig is the market-share leader and has the largest variety of cups that are used to make coffees and teas.
9. A small town has only one pizza place, The Pizza Factory. A small competitor, Perfect Pies, is thinking about entering the market. The profits of these two firms depend on whether Perfect Pies
8. Trade agreements encourage countries to curtail tariffs (taxes on imports) so that goods may flow across international boundaries without restrictions. Using the following payoff matrix, determine
7. Suppose that the marginal cost of mining gold is constant at $300 per ounce and the demand schedule is as follows:a. If the number of suppliers is large, what would be the price and quantity?b. If
6. Your economics instructor is at it again (see question 4). This time, you have to do a two-student project. Assume that you and your partner are both interested in maximizing your grade, but you
4. After teaching a class on game theory, your instructor announces that if every student skips the last question on the next exam, everyone will receive full credit for that question.However, if one
3. Imagine that your roommate’s alarm goes off at 4:30 every morning, and she hits snooze every 10 minutes until 6:00, when you both need to get up. She insists that this maddening procedure is the
1. Some places limit the number of hours that alcohol can be sold on Sunday. Is it possible that this sales restriction could help liquor stores? Use game theory to construct your answer. (Hint: Even
2. How does the addition of another firm affect the ability of the firms in an oligopolistic industry to form an effective cartel?
10. Read the following online article:http://20somethingfinance.com/why- eyeglasses-are-so-expensive-how-you-can-pay-less/. Using your understanding of monopolistic competition and markup, explain
9. Taste of India is a small restaurant in a small town. The owner of Taste of India marks up his dishes by 300%. Indian Cuisine is a small restaurant in a large city. The owner of Indian Cuisine
8. Titleist has an advertising slogan: “the #1 ball in golf.” Consumers can also buy generic golf balls. The manufacturers of generic golf balls do not engage in any advertising. Assume that the
7. In the diagram below, identify the demand curve consistent with a monopolistic competitor making zero long-run economic profit. Explain why you have chosen that demand curve and why the other two
5. Econoburgers, a fast-food restaurant in a crowded local market, has reached a long-run equilibrium.a. Draw a diagram showing demand, marginal revenue, average total cost, and marginal cost curves
3. Which of the following are the same under monopolistic competition and in a competitive market in the long run?a. the markup the firm chargesb. the price the firm charges to consumersc. the
2. Which of the following could be considered a monopolistic competitor?a. a local corn farmerb. the Tennessee Valley Authority, a large electricity producerc. pizza deliveryd. a grocery storee. Kate
1. At your high school reunion, a friend describes his plan to take a break from his florist shop and sail around the world. He says that if he continues to make the same economic profit for the next
6. Draw a typical demand curve for competitive markets, monopolistic competition, and monopoly. Which of these demand curves is the most inelastic? Why?
8. Orbitz, the travel web site, routinely offers PC and Apple users different search results.Apple users typically have higher-priced hotels show up on the top page of the results, while PC users are
7. Have you ever tipped a restaurant host in order to bypass a long wait and get a table more quickly? Would this be an example of price discrimination? Why or why not? Discuss.
6. Metropolitan Opera tickets are the most expensive on Saturday night. There are often a very limited number of “student rush tickets,” with which a lucky student can wind up paying $20 for a
5. Prescription drug prices in the United States are often substantially higher than in Canada, the United Kingdom, and India. Today, pharmacies in these countries fill millions of low-cost
4. Name three products for which impatience on the part of the consumer enables a firm to price-discriminate.
3. At many amusement parks, customers who enter after 4 p.m. receive a steep discount on the price of admission. Explain how this practice is a form of price discrimination.
2. Which of the following are examples of price discrimination? Explain your answers.a. A cell phone carrier offers unlimited calling on the weekends for all of its customers.b. Tickets to the
1. Seven potential customers are interested in seeing a movie. Because the marginal cost of admitting additional customers is zero, the movie theater maximizes its profits by maximizing its
11. Go to www.economicsoftheoffice.com and watch the two short clips from The Office episode “Moroccan Christmas.” How is Dwight able to establish a monopoly in this market?Discuss.
10. Suppose that a monopolist’s marginal cost curve shifts upward. What is likely to happen to the price the monopolist charges, the quantity it produces, and the profit it makes? Use a graph to
9. A local community bus service charges $2.00 for a one-way fare. The city council is thinking of raising the fare to $2.50 to generate 25% more revenue. The council has asked for your advice as a
8. A small community is served by five independent gas stations. Gasoline is a highly competitive market. Use the market demand curve to illustrate the consumer surplus and producer surplus created
7. Recalling what you have learned about elasticity, what can you say about the connection between the price a monopolist chooses to charge and whether or not demand is elastic, unitary, or inelastic
6. A new musical group called The Incentives cuts a debut single. The record company determines a number of price points for the group’s first single, “The Big Idea.”The record company can
4. The year is 2278, and the starship Enterprise is running low on dilithium crystals, which are used to regulate the matter-antimatter reactions that propel the ship across the universe.Without the
3. A monopolist has the following fixed and variable costs:At what level of output will the monopolist maximize profits? Fixed Variable Price Quantity cost cost $10 0 $8 $0 $9 1 8 5 $8 $7 23 2 8 8 3
2. Which of the following could be considered a monopoly?a. your local water companyb. Boeing, a manufacturer of airplanesc. Brad Pittd. Walmarte. the only gas station along a 100-mile stretch of road
1. In the figure below, identify the price the monopolist will charge and the output the monopolist will produce. How do these two decisions on the part of the monopolist compare with the efficient
4. Why is a monopolist’s marginal revenue curve less than the price of the good it sells?
2. What are barriers to entry, and why are they crucial to the creation of potential long-run monopoly profits? Give an example of a barrier that can lead to monopoly.
12. You pay $10 to see Furious 10, but realize 15 minutes into the film that the plot and acting are truly terrible. What economic concept should you use to help you decide whether to leave or stay
11. Suppose you are the owner of a firm producing jelly beans. Your production costs are shown in the following table. Initially, you produce 100 boxes of jelly beans per time period. Then a new
10. Barney’s snow removal service is a profit-maximizing, competitive firm. Barney clears driveways for $10 each. His total cost each day is $250, and half of his total costs are fixed. If Barney
9. Do you agree or disagree with the following statement? “A profit-maximizing, perfectly competitive firm should select the output level at which the difference between the marginal revenue and
8. Three students at the same school hear about the success of cookie delivery businesses on college campuses. Each student decides to open a local service. The individual supply schedules are shown
7. A firm is experiencing a loss of $5,000 per year. The firm has fixed costs of $8,000 per year.a. Should the firm operate in the short run or shut down?b. If the situation persists into the long
5. Use the graph to answer the questions that follow.a. At what prices is the firm making an economic profit, breaking even, and experiencing an economic loss?b. At what prices would the firm shut
4. In the following table, fill in the blanks. After you have completed the entire table, determine the profit-maximizing output. Total Marginal Total Marginal Total Output Price revenue revenue cost
3. Determine whether the following statements are true or false. Explain your answers.a. A firm will make a profit when the price it charges exceeds the average variable cost of the chosen output
2. A local snow cone business sells snow cones in one size for $3 each. It has the following cost and output structure per hour:Output (cones per hour) Total cost (per hour)0 $60 10 90 20 110 30 120
1. Using the definition of a price taker as your guide, explain why each of the following industries does not meet the definition.a. the pizza delivery businessb. the home improvement businessc. cell
4. What is the difference between the decision to go out of business and the decision to shut down?
11. If you are a fan of cold dessert treats, you’ll recognize that the production process at Cold Stone Creamery differs a great deal from frozen yogurt places. At Cold Stone you give the server
9. Suppose that you own a yard care business.You have your own mower, flatbed truck, and other equipment. You are also the primary employee. Why might you have trouble calculating your profits?
8. Many amusement parks offer two-day passes at dramatically discounted prices. If a one-day pass costs $40 but the two-day pass costs $50, what is the average cost for the two-day pass?What is the
7. An airline has a marginal cost per passenger of$30 on a route from Boston to Detroit. At the same time, the typical fare charged is $300.The planes that fly the route are usually full, yet the
6. Digital media distributed over the Internet often have marginal costs of zero. For instance, people can download music and movies instantly through many providers. Do these products exhibit
5. True or false?a. The AFC curve can never rise.b. Diminishing marginal product is a long-run constraint that prevents lower costs.c. The MC curve intersects the AVC and ATC curves at the minimum
4. A firm is considering changing its plant size, so it calculates the average cost of production for various plant sizes, shown below. If the firm is currently using plant size C, is the firm
3. A pizza business has the cost structure described below. The firm’s fixed costs are$25 per day. Calculate the firm’s average fixed costs, average variable costs, average total costs, and
1. Go to www.lemonadegame.com. This free online game places you in the role of a lemonade seller. Nothing could be simpler, right?Not so fast! You still need to control costs and ensure that you have
7. Name examples of industries that illustrate each of the following: economies of scale, constant returns to scale, and diseconomies of scale. Think creatively; do not use the textbook examples.
4. Describe what happens to the total product of a firm when marginal product is increasing, decreasing, and negative.
3. What role does diminishing marginal product play in determining the ideal mix of labor and capital a firm should use?
1. What is the equation for the profit (or loss) of a firm?
12. If a company pollutes the water and transactions costs are high, which of the following makes the most economic sense?a. All parties connected with the pollution should negotiate.b. The company
11. Describe the difference between the way an environmental economist thinks about policy and the way an environmentalist thinks about policy.(Hint: Recall the difference between positive economics
10. In most areas, developers are required to submit an environmental impact study before work can begin on a new construction project.Suppose that a commercial developer wants to build a new
9. A study finds that leaf blowers make too much noise, so the government imposes a $10 tax on the sale of every unit to correct for the social cost of the noise pollution. The tax completely
8. Two companies, Toxic Waste Management and Sludge Industries, both pollute a nearby lake.Each firm dumps 1,000 gallons of goo into the lake every day. As a consequence, the lake has lost its

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