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business
modern principles of economics

Questions and Answers of Modern Principles Of Economics

What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits?
When a monopolist identifies its profit-maximizing quantity of output, how does it decide what price to charge?
Is a monopolist allocatively efficient? Why or why not?
How does the quantity produced and price charged by a monopolist compare to that of a perfectly competitive firm?
ALCOA does not have the monopoly power it once had. How do you suppose their barriers to entry were weakened?
Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or
Draw the demand curve, marginal revenue, and marginal cost curves from Figure 9.6, and identify the quantity of output the monopoly wishes to supply and the price it will charge. Suppose demand for
Return to Figure 9.2. Suppose P0 is $10 and P1 is $11. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4,000 units of output. Estimate from the
Aside from advertising, how can monopolistically competitive firms increase demand for their products?
What is the usual shape of a total revenue curve for a monopolist? Why?
What is the usual shape of a marginal revenue curve for a monopolist? Why?
How can a monopolist identify the profit-maximizing level of output if it knows its total revenue and total cost curves?
How can a monopolist identify the profit-maximizing level of output if it knows its marginal revenue and marginal costs?
Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it
Is it true that a merger between two firms that are not already in the top four by size can affect both the four-firm concentration ratio and the Herfindahl-Hirshman Index? Explain briefly.
Is it true that the four-firm concentration ratio puts more emphasis on one or two very large firms, while the Herfindahl-Hirshman Index puts more emphasis on all the firms in the entire market?
Some years ago, two intercity bus companies, Greyhound Lines, Inc. and Trailways Transportation System, wanted to merge. One possible definition of the market in this case was “the market for
As a result of globalization and new information and communications technology, would you expect that the definitions of markets that antitrust authorities use will become broader or narrower?
Why would a firm choose to use one or more of the anticompetitive practices described in Regulating Anticompetitive Behavior?
Why are generic pharmaceuticals significantly cheaper than name brand ones?
For many years, the Justice Department has tried to break up large firms like IBM, Microsoft, and most recently Google, on the grounds that their large market share made them essentially monopolies.
Intellectual property laws are intended to promote innovation, but some economists, such as Milton Friedman, have argued that such laws are not desirable. In the United States, there is no
Imagine that you are managing a small firm and thinking about entering the market of a monopolist. The monopolist is currently charging a high price, and you have calculated that you can make a nice
If a monopoly firm is earning profits, how much would you expect these profits to be diminished by entry in the long run?
Draw a monopolist’s demand curve, marginal revenue, and marginal cost curves. Identify the monopolist’s profit-maximizing output level. Now, think about a slightly higher level of output (say Q0
How can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or experience losses?
If the firms in a monopolistically competitive market are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Why?
Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain.
Is a monopolistically competitive firm productively efficient? Is it allocatively efficient? Why or why not?
Would you rather have efficiency or variety? That is, one opportunity cost of the variety of products we have is that each product costs more per unit than if there were only one kind of product of a
Make a case for why monopolistically competitive industries never reach long-run equilibrium.
Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC
When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term—that the incentives for individual members to
From the graph you drew to answer Exercise 11.6, would you say this transit system is a natural monopoly? Justify. Use the following information to answer the next three questions. In the years
What is a “price taker” firm?
Name some factors that can cause a shift in the demand curve in labor markets.
How do economists define equilibrium in financial markets?
Would usury laws help or hinder resolution of a shortage in financial markets?
Whether the product market or the labor market, what happens to the equilibrium price and quantity for each of the four possibilities: increase in demand, decrease in demand, increase in supply, and
Suppose that a 5% increase in the minimum wage causes a 5% reduction in employment. How would this affect employers and how would it affect workers? In your opinion, would this be a good policy?
Under what circumstances would a minimum wage be a nonbinding price floor? Under what circumstances would a living wage be a binding price floor?
Are households demanders or suppliers in the goods market? Are firms demanders or suppliers in the goods market? What about the labor market and the financial market?
Name some factors that can cause a shift in the supply curve in labor markets.
Suppose the U.S. economy began to grow more rapidly than other countries in the world. What would be the likely impact on U.S. financial markets as part of the global economy?
If the government imposed a federal interest rate ceiling of 20% on all loans, who would gain and who would lose?
Why are the factors that shift the demand for a product different from the factors that shift the demand for labor? Why are the factors that shift the supply of a product different from those that
During a discussion several years ago on building a pipeline to Alaska to carry natural gas, the U.S. Senate passed a bill stipulating that there should be a guaranteed minimum price for the natural
Identify each of the following as involving either demand or supply. Draw a circular flow diagram and label the flows A through F. (Some choices can be on both sides of the goods market.)a.
Predict how each of the following events will raise or lower the equilibrium wage and quantity of oil workers in Texas. In each case, sketch a demand and supply diagram to illustrate your answer.a.
Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers.a.
Table 4.6 shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and
Imagine that to preserve the traditional way of life in small fishing villages, a government decides to impose a price floor that will guarantee all fishermen a certain price for their catch.a. Using
What happens to the price and the quantity bought and sold in the cocoa market if countries producing cocoa experience a drought and a new study is released demonstrating the health benefits of
The equation for a supply curve is 4P = Q. What is the elasticity of supply as price rises from 3 to 4? What is the elasticity of supply as the price rises from 7 to 8? Would you expect these answers
The equation for a supply curve is P = 3Q – 8. What is the elasticity in moving from a price of 4 to a price of 7?
The supply of paintings by Leonardo Da Vinci, who painted the Mona Lisa and The Last Supper and died in 1519, is highly inelastic. Sketch a supply and demand diagram, paying attention to the
Say that a certain stadium for professional football has 70,000 seats. What is the shape of the supply curve for tickets to football games at that stadium? Explain.
When someone’s kidneys fail, the person needs to have medical treatment with a dialysis machine (unless or until they receive a kidney transplant) or they will die. Sketch a supply and demand
Assume that the supply of low-skilled workers is fairly elastic, but the employers’ demand for such workers is fairly inelastic. If the policy goal is to expand employment for low-skilled workers,
If demand is inelastic, will shifts in supply have a larger effect on equilibrium price or on quantity?
If supply is elastic, will shifts in demand have a larger effect on equilibrium quantity or on price?
If supply is inelastic, will shifts in demand have a larger effect on equilibrium price or on quantity?
Would you usually expect elasticity of demand or supply to be higher in the short run or in the long run? Why?
Under which circumstances does the tax burden fall entirely on consumers?
What is the formula for the income elasticity of demand?
What is the formula for the cross-price elasticity of demand?
What is the formula for the wage elasticity of labor supply?
What is the formula for elasticity of savings with respect to interest rates?
Transatlantic air travel in business class has an estimated elasticity of demand of 0.62, while transatlantic air travel in economy class has an estimated price elasticity of 0.12. Why do you think
What is the relationship between price elasticity and position on the demand curve? For example, as you move up the demand curve to higher prices and lower quantities, what happens to the measured
Can you think of an industry (or product) with near infinite elasticity of supply in the short term? That is, what is an industry that could increase Qs almost without limit in response to an
Would you expect supply to play a more significant role in determining the price of a basic necessity like food or a luxury like perfume? Explain.
A city has built a bridge over a river and it decides to charge a toll to everyone who crosses. For one year, the city charges a variety of different tolls and records information on how many drivers
In a market where the supply curve is perfectly inelastic, how does an excise tax affect the price paid by consumers and the quantity bought and sold?
Economists define normal goods as having a positive income elasticity. We can divide normal goods into two types: Those whose income elasticity is less than one and those whose income elasticity is
Suppose you could buy shoes one at a time, rather than in pairs. What do you predict the cross-price elasticity for left shoes and right shoes would be?
The equation for a demand curve is P = 48 – 3Q. What is the elasticity in moving from a quantity of 5 to a quantity of 6?
The equation for a demand curve is P = 2/Q. What is the elasticity of demand as price falls from 5 to 4? What is the elasticity of demand as the price falls from 9 to 8? Would you expect these
Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a
Take Jeremy’s total utility information in Exercise 6.1, and use the marginal utility approach to confirm the choice of phone minutes and round trips that maximize Jeremy’s utility.Exercise
Explain all the reasons why a decrease in a product's price would lead to an increase in purchases.
As a college student you work at a part-time job, but your parents also send you a monthly “allowance.” Suppose one month your parents forgot to send the check. Show graphically how your budget
Who determines how much utility an individual will receive from consuming a good?
Would you expect total utility to rise or fall with additional consumption of a good? Why?
Would you expect marginal utility to rise or fall with additional consumption of a good? Why?
Is it possible for total utility to increase while marginal utility diminishes? Explain.
If people do not have a complete mental picture of total utility for every level of consumption, how can they find their utility-maximizing consumption choice?
What is the rule relating the ratio of marginal utility to prices of two goods at the optimal choice? Explain why, if this rule does not hold, the choice cannot be utility-maximizing.
As a general rule, is it safe to assume that a change in the price of a good will always have its most significant impact on the quantity demanded of that good, rather than on the quantity demanded
Why does a change in income cause a parallel shift in the budget constraint?
Think back to a purchase that you made recently. How would you describe your thinking before you made that purchase?
The rules of politics are not always the same as the rules of economics. In discussions of setting budgets for government agencies, there is a strategy called “closing the Washington Monument.”
Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true
Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first poem, 27 units of marginal utility from
If a 10% decrease in the price of one product that you buy causes an 8% increase in quantity demanded of that product, will another 10% decrease in the price cause another 8% increase (no more and no
A firm had sales revenue of $1 million last year. It spent $600,000 on labor, $150,000 on capital and $200,000 on materials. What was the firm’s accounting profit?
Continuing from Exercise 7.1, the firm’s factory sits on land owned by the firm that it could rent for $30,000 per year. What was the firm’s economic profit last year?Exercise 7.1A firm had sales
If two painters can paint 200 square feet of wall in an hour, and three painters can paint 275 square feet, what is the marginal product of the third painter?
The WipeOut Ski Company manufactures skis for beginners. Fixed costs are $30. Fill in Table 7.16 for total cost, average variable cost, average total cost, and marginal cost.Table 7.16
Suppose the cost of machines increases to $55, while the cost of labor stays at $40. How would that affect the total cost of the three methods? Which method should the firm choose now?

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