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business
principles of economics

Questions and Answers of Principles Of Economics

14 Use the graph in problem 1 and the information in problem 2 and show on the graph the strawberry pickers’: a Economic rent. b Opportunity cost.
*13 Use the graph in problem 1 and show on the graph the strawberry pickers’: a Economic rent. b Opportunity cost.
12 Orley has a wine cellar in which he keeps choice wines from around the world. What does Orley expect to happen to the prices of the wines he keeps in his cellar? Explain your answer. How does
*11 Greg has found an oil well in his backyard. A geologist estimates that a total of 10 million barrels can pump for a pumping cost of a1 a barrel. If the price of oil is a20 a barrel, how many
10 Using the information in problem 4, calculate Barry’s marginal revenue, marginal cost, and marginal revenue product. Show that when Barry is making maximum profit, marginal cost equals
*9 Using the information in problem 3, calculate Wanda’s marginal revenue, marginal cost, and marginal revenue product. Show that when Wanda is making maximum profit, marginal cost equals marginal
8 Back at Barry’s ice shop described in problem 4, baggers’ wages increase to a10 an hour, but the price of ice remains at 25 cents a bag. a What happens to marginal revenue product? b What
*7 Back at Wanda’s fish shop described in problem 3, packers’ wages increase to a10 an hour, but the price of fish remains at 50 cents a kilogram. a What happens to marginal revenue product? b
6 Back at Barry’s ice making plant described in problem 4, the price of ice falls to 10 cents a bag but baggers’ wages remain at a5.00 an hour, what happens to: a Barry’s marginal product? b
*5 Back at Wanda’s fish shop described in problem 3, the price of fish falls to a33.33 a kilogram but fish packers’ wages remain at a7.50 an hour, what happens to: a Wanda’s marginal product? b
4 The European ice market is competitive and Barry makes bags of ice. He employs workers to bag the ice who can produce the following quantities in an hour: Number of Quantity of ice workers (bags) 1
*3 The European fish packing industry is competitive and Wanda owns a fish shop. She employs students to sort and pack the fish. Students can pack the following amounts of fish in an hour:Number of
2 In problem 1, if the demand for strawberry pickers increases by 100 a day, a What is the new wage rate paid to the pickers? b How many additional pickers get employed? c What is the total income
*1 The figure illustrates a European market for strawberry pickers a What is the wage rate paid to strawberry pickers? b How many strawberry pickers get employed? c What is the income received by
4 Is coffee more expensive in London than in Lincoln because rents are higher in London or are rents higher in London because people in London are willing to pay more for a coffee?
3 Is the income that Manchester United pays Wayne Rooney an economic rent, compensation for his opportunity cost, or a combination of economic rent and opportunity cost? Explain.
2 What is the distinction between an economic rent and an opportunity cost?
1 Why do premier league football players earn larger incomes than bus drivers?
5 Why do the prices of non-renewable natural resources not follow the path predicted by the Hotelling Principle?
4 Why is the price of a non-renewable natural resource expected to rise at a rate equal to the interest rate?
3 At what price is the flow supply of a non-renewable natural resource perfectly elastic and why?
2 Why is the supply of a renewable natural resource such as land perfectly inelastic?
1 Define a renewable natural resource and a nonrenewable natural resource and provide some examples of each.
6 What have been the main changes in the interest rate and how can we use the demand and supply of capital to explain those changes?
5 What are the main influences on the supply of capital?
4 What are the main influences on a firm’s demand for capital?
3 How does a firm compare the future marginal revenue product of capital with the current price of capital?
2 What is discounting and how is it used to calculate present value? When might you want to calculate a present value to make a decision?
1 What is the distinction between physical capital and financial capital and what is the capital market?
5 Describe and explain the trends in wages and employment.
4 What determines the amount of labour that households plan to supply?
3 Why is it that when a firm’s marginal revenue product equals the wage rate, marginal revenue also equals marginal cost?
2 Distinguish between marginal revenue product and marginal revenue and illustrate the distinction with an example.
1 What links the quantity that a firm produces and the quantity of labour it employs?
2 Why does an increase in the supply of a factor of production have an ambiguous effect on the factor’s income?
1 Why do we call the demand for a factor of production a derived demand? From what is it derived?
1 Read the article on demand revealing processes. a What is a demand revealing process and what is its purpose? b Why might using a demand revealing process deliver a more efficient level of public
2 Your city council is contemplating upgrading its system for controlling traffic signals. The council believes that by installing computers, it can improve the speed of the traffic flow. The bigger
1 After you have studied Reading Between the Lines on pp. 360–361, answer the following questions: a What is happening in Malaysia that is contributing to the depletion of the Indonesian tropical
4 The table shows the value of salmon caught in the Pacific Ocean by US, Canadian and Japanese fishing boats. It also shows the value that concerned citizens of the United States, Canada and Japan
*3 The table shows the value of cod caught in the North Atlantic Ocean by American and European fishing boats. It also shows the value that concerned citizens of America, Canada and Europe place on
2 You are provided with the following information about a mosquito control programme. Quantity Marginal cost Marginal benefit (squares miles sprayed per day) (euros per day) 0 00 1 1,000 5,000 2
*1 You are provided with the following information about a sewage disposal system that a city of 1 million people is considering installing. a What is the capacity that achieves maximum net benefit?
4 Review three methods that might achieve the efficient use of a common resource and explain the obstacles to efficiency.
3 Describe the conditions under which a common resource is used efficiently.
2 Provide two examples of the problem of the commons, including one from your own neighbourhood.
1 What is the problem of the commons?
2 Under what conditions will competition for votes among politicians result in an efficient quantity of a public good? 3 How do rationally ignorant voters and budget maximizing civil servants prevent
1 What is the free-rider problem and why does it make the private provision of a public good inefficient?
3 Visit the Website of the UK government’s Department of Education. Read about the introduction of top-up fees for students in higher education and then answer the following questions. a To what
2 Visit the Website of the UK Environment Agency and then answer the following questions: a Describe the trend in UK emissions of carbon dioxide and sulphur dioxide over the past 20 years. b Describe
1 Obtain two viewpoints on global warming. Then answer the following questions: a What are the benefits and costs of greenhouse gas emissions? b Do you agree with environmentalists that greenhouse
1 After you have studied Reading Between the Lines on pp. 342–343, answer the following questions: a What reasons has the Irish government given for introducing a tax on chewing gum? b What are the
8 Online learning aids cuts the marginal cost of educating a student to a2,000 a year. The marginal private benefit is the same as that in problem 7. The external benefit from education increases to
*7 The marginal cost of educating a student is a4,000 a year and is constant. The figure shows the marginal private benefit curve. a With no government involvement and if the schools are
6 Using the information given in problem 2, suppose that the city government issues two marketable pollution permits, one to the city government and one to the smelter. Each may pollute the air by
*5 Using the information provided in problem 1, suppose that no one owns the lake and that the government issues two marketable pollution permits, one to the farmer and one to the factory. Each may
4 Back at the steel smelter and city in problem 2, suppose that the city government introduces a pollution tax. a What is the tax per tonne of steel produced that will achieve an efficient outcome? b
*3 Back at the pesticide plant and trout farm described in problem 1, suppose that no one owns the lake and that the government introduces a pollution tax. a What is the tax per tonne of pesticide
2 The table at the top of the next column provides information about the costs and benefits of steel smelting that pollutes the air of a city. a With no property rights in the city’s air and no
*1 The table provides information about costs and benefits from the production of pesticide that pollutes a lake used by a trout farmer.Trout farmer’s Total Pesticide MC from Marginal product
10 Explain the main differences between a regulated private monopoly and a monopoly in public ownership. Which do you think provides the best way of achieving an efficient use of resources and why.
9* Explain the main differences between regulation and monopoly law. In which situations does each apply? Provide examples of the use of each approach to regulating monopoly and oligopoly in Europe.
8 Two telephone companies offer local calls in an area. The figure shows the market demand curve for calls and the marginal cost curves of each firm. These firms are regulated. a What is the price
*7 Two airlines share an international route. The figure shows the demand curve for trips on this route and the marginal cost curve that each firm faces.a What is the price of a trip and what is the
6 The EU Commission regulates Cascade Springs in problem 2 by imposing an average cost pricing rule. a What is the price of Cascade Springs water? b How many bottles does Cascade Springs sell? c Is
5* The EU Commission regulates Elixir Springs in problem 1 by imposing an average cost pricing rule. a What is the price of a bottle of Elixir? b How many bottles does Elixir Springs sell? c Is the
4 The EU Commission regulates Cascade Springs in problem 2 by imposing a marginal cost pricing rule. a What is the price of Cascade Springs water? b How many bottles does Cascade Springs sell? c Is
*3 The EU Commission regulates Elixir Springs in problem 1 by imposing a marginal cost pricing rule. a What is the price of a bottle of Elixir? b How many bottles does Elixir Springs sell? c Is the
2 Cascade Springs, Inc., is a natural monopoly that bottles water from a spring high in the Alps. The total fixed cost it incurs is a120,000, and its marginal cost is 20 cents a bottle. The figure
*1 Elixir Springs, Inc., is an unregulated European natural monopoly that bottles Elixir, a unique health product with no substitutes. The total fixed cost incurred by Elixir Springs is a150,000, and
5 When might privatization be successful and why?
4 Why might governments want to privatize a publicly owned company?
3 How can governments fight the padding of costs?
2 What are the effects of budget maximization by managers in publicly owned companies?
1 How might a company under public ownership operate efficiently?
2 What are the main differences between the UK and EU monopoly control laws?
1 What main aspects of firms’ activities do monopoly control laws cover?
5 Why is it necessary to regulate a cartel and how could cartels be regulated in the social interest?
4 What pricing rule is typically used to regulate a natural monopoly and what problems does it create?
3 Why is a marginal cost pricing rule difficult to implement?
2 What pricing rule enables a natural monopoly to operate in the social interest?
1 Why does a natural monopoly need to be regulated?
6 What is a political equilibrium? When does the political equilibrium achieve economic efficiency?
5 When politicians and civil servants supply regulation, what are they trying to achieve? Do politicians and civil servants have the same objectives? Explain your answer.
4 How do consumers and producers express their demand for economic regulation? What are their objectives? What are the costs of expressing a demand for regulation?
3 Describe the political marketplace. Who are the demanders and who are the suppliers? How do the demanders “pay” the suppliers?
2 Describe five areas in which government choices influence economic life.
1 What are the three main reasons why governments exist?
2 Obtain information about the market for art and antiques. a What illegal act occurred in the art and antiques auction market during the 1990s? b Describe the game played by Sotheby’s and
1 Obtain information about the market for vitamins. a In what type of market are vitamins sold? b What illegal act occurred in the vitamins market during the 1990s? c Describe the actions of BASF and
3 Explain the behaviour of the prices of computer chips in 1994 and 1995 by using the prisoners’ dilemma game. Describe the types of strategies that individual firms in the industry have adopted.
2 Read Box 13.1 about soap market game on pp. 294–295 and then answer the following questions: a Why do Procter & Gamble and Unilever spend huge amounts of money on washing powder products? b Do
1 Read the Business case Study on pp. 300–301 and answer the following questions: a Why do you think Sainsbury’s did not follow Tesco’s innovative lead to introduce customer loyalty cards? b
12 Two firms, Faster and Quicker, are the only two producers of sports cars on an island that has no contact with the outside world. The firms collude and agree to share the market equally. If
*11Two firms, Soapy and Suddsies plc., are the only producers of soap powder. They collude and agree to share the market equally. If neither firm cheats on the agreement, each makes a1 million
10 Describe the game known as the prisoners’ dilemma. In describing the game: a Make up a story that motivates the game. b Work out a payoff matrix. c Describe how the equilibrium of the game is
*9 Consider the following game. The game has two players, and each player is asked a question. The players can answer the question truthfully or they can lie. If both answer truthfully, each
8 An industry with one very large firm and 100 very small firms experiences an increase in total variable cost. Use the dominant firm model to explain the effects on the price, output and economic
*7 An industry with one very large firm and 100 very small firms experiences an increase in the demand for its product. Use the dominant firm model to explain the effects on the price, output and

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