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business
principles of economics

Questions and Answers of Principles Of Economics

6 A firm with a kinked demand curve experiences an increase in its variable cost. Explain the effects on the firm’s price, output and economic profit/loss.
*5 A firm with a kinked demand curve experiences an increase in its fixed costs. Explain the effects on the firm’s price, output and economic profit/loss.
4 The firm in problem 3 has the same demand and costs as before if it does not advertise. But it hires a new advertising agency. If the firm spends a3,000 a day on advertising with the new agency, it
*3 A firm in monopolistic competition produces running shoes. If it spends nothing on advertising, it can sell no shoes at a100 a pair and, for each a10 cut in price, the quantity of shoes it can
2 The figure shows the situation facing Well Done plc., a European producer of steak sauce. a What quantity does Well Done produce? b What does it charge? c How much profit does Well Done make?
*1 The figure shows the situation facing Lite and Kool plc., a European producer of running shoes.a What quantity does Lite and Kool produce? b What does it charge? c How much profit does Lite and
2 If a market is contestable, how does the equilibrium differ from that of a monopoly?
1 If a prisoners’ dilemma game is played repeatedly, what punishment strategies might the players employ and how does playing the game repeatedly change the equilibrium?
6 Describe two structures of payoffs for an R&D game and contrast the prisoners’ dilemma and chicken game.
5 What is the equilibrium strategy for each firm in a duopolists’ dilemma and why do the firms not succeed in colluding to raise the price and profits?
4 What creates an incentive for firms in a collusive agreement to cheat and increase production?
3 Why does a collusive agreement to restrict output and raise price create a game like the prisoners’ dilemma?
2 Describe the prisoners’ dilemma game and explain why the Nash equilibrium delivers a bad outcome for both players.
1 What are the common features of all games?
2 Do you think a market with a dominant firm is in long-run equilibrium? Explain why or why not.
1 What does the kinked demand curve model predict and why must it sometimes make a prediction that contradicts its basic assumption?
3 In addition to the examples given above, provide some examples of industries with which you are familiar that operate in oligopoly.
2 What arrangement are firms in oligopoly tempted to try to make?
1 What are the distinguishing characteristics of oligopoly?
5 In addition to the examples given above, provide some examples of industries near your university that operate in monopolistic competition.
4 How do firms in monopolistic competition compete?
3 Compare the characteristics of monopolistic competition and monopoly.
2 Compare the characteristics of monopolistic competition and perfect competition.
1 What are the distinguishing characteristics of monopolistic competition?
2 Obtain information on Microsoft, then answer the following questions. a Is it correct to call Microsoft a monopoly? Explain why or why not. b How do you think that Microsoft set the price of
1 Study the market for computer chips, then answer the following questions. a Is it correct to call Intel a monopoly? Explain why or why not. b How does Intel try to raise barriers to entry in this
1. Study Reading Between the Lines on pp. 268–269 and then answer the following questions: a Why is eBay a monopoly but Google not a monopoly? b How would you regulate the Internet search engine
8 If in problem 7 marginal cost doubles, what now are your answers?
*7 The figure illustrates the situation facing a natural monopoly that cannot price discriminate:What quantity will the firm produce and what will be the deadweight loss if the firm is: a An
6 The figure illustrates the situation facing the only coffee bar in an isolated community:a What is the quantity of coffee that will maximize the firm’s profit? b What price will the coffee bar
*5 The figure illustrates the situation facing the publisher of the only newspaper containing local news in an isolated UK community.a What quantity of newspapers will maximize the publisher’s
4 Danny’s Diamond Mines in problem 2 has the following total cost: Quantity produced Total cost (diamonds per day) (euros) 1 1,220 2 1,300 3 1,400 4 1,520 a Calculate the marginal cost of
*3 Minnie’s European Mineral Springs in problem 1 has the following total cost: Quantity produced Total cost (bottles) (euros) 0 1 1 3 2 7 3 13 4 21 5 31 a Calculate the marginal cost of producing
2 Danny’s Diamond Mines, a single-price monopoly, faces the market demand schedule: Price Quantity demanded (euros per diamond) (diamonds per day) 1,100 0 900 1 700 2 500 3 300 4 a Calculate the
*1 Minnie’s European Mineral Springs, a single-price monopoly, faces the market demand schedule: Price Quantity demanded (euros per bottle) (bottles) 10 0 8 1 6 2 4 3 2 4 0 5 a Calculate the total
5 Compare the consumer surplus, producer surplus and deadweight loss that arise from average cost pricing with those that arise from profit maximization pricing and marginal cost pricing.
4 What is the price that achieves an efficient outcome for a regulated monopoly? And what is the problem with this price?
3 Why might the incentive to innovate be greater for a monopoly than for a small competitive firm?
2 Can you provide some examples of economies of scale and economies of scope?
1 What are the two main reasons why monopoly is worth tolerating?
4 What are some of the ways that real-world airlines use to price discriminate?
3 Explain how consumer surplus, economic profit and output change when a monopoly perfectly price discriminates.
2 Explain how consumer surplus changes when a monopoly price discriminates.
1 What is price discrimination and how is it used to increase a monopoly’s profit?
4 What is rent seeking and how does it influence the inefficiency of monopoly?
3 Why is a single-price monopoly inefficient?
2 How does a monopoly transfer consumer surplus to itself?
1 Why does a single-price monopoly produce a smaller output and charge a higher price than what would prevail if the industry were perfectly competitive?
4 Why can a monopoly make a positive economic profit even in the long run?
3 What is the relationship between price, marginal revenue and marginal cost when a single-price monopoly is maximizing profit?
2 How does a single-price monopoly determine the price it will charge its customers?
1 What is the relationship between marginal cost and marginal revenue when a single-price monopoly maximizes profit?
2 Read about the EU decision to increase the quotas on imports of textiles from China. a Why do you think the European Union limits imports of textiles from China? b Draw a graph to illustrate the EU
1 Read about “grey imports from Japan”. Then answer the following questions: a What is meant by a “grey import”? b How do grey imports influence the UK car market in the short run? c Do you
7* In problem 5, a fall in the price of digital tapes decreases the demand for CDs permanently and the demand schedule becomes: Price Quantity demanded (euros per CD) (CDs per week) 2.95 500,000 4.13
6 The same demand conditions as those in Problem 5 prevail and there are still 1,000 firms in the industry, but fixed costs increase by a980. What now are your answers to the questions in problem 5?
*5 The EU market demand schedule for pop CDs is: Price Quantity demanded (euros per CD) (CDs per week) 3.65 500,000 4.40 475,000 5.20 450,000 6.00 425,000 6.80 400,000 7.60 375,000 8.40 350,000 9.20
4 Luigi’s Lasagna is a price taker. Its costs are: Output Total cost (plates per hour) (euros per hour) 0 14 1 38 2 48 3 62 4 80 5 102 6 128 a What is Luigi’s profit-maximizing output and how
*3 Pat’s Pizza Restaurant is a price taker. It has the following hourly costs: Output Total cost (pizza per hour) (pounds per hour) 0 10 1 21 2 30 3 41 4 54 5 69 a What is Pat’s profit-maximizing
2 Bob’s is one of many burger stands at Leeds United football stadium. The figure shows Bob’s cost curves.a If the market price of a burger is £4, what is Bob’s profit-maximizing output? b
*1 Quick Copy is one of the many copy shops in London. The figure shows Quick Copy’s cost curves.a If the market price of copying one page is 10 pence, what is Quick Copy’s profit-maximizing
4 What is a marginal social cost?
3 What is the marginal social benefit?
2 What are external benefits and external costs? Give two examples of each.
1 Explain why a perfectly competitive industry achieves an efficient use of resources.
3 Describe the course of events in a competitive industry following the adoption of a new technology. What happens to output, market price and economic profit in the short run and in the long run?
2 Describe the course of events in a competitive industry following a permanent increase in demand. What happens to output, market price and economic profit in the short run and in the long run?
1 Describe the course of events in a competitive industry following a permanent decrease in demand. What happens to output, market price and economic profit in the short run and in the long run?
4 Under what conditions would a firm choose to change its plant size?
3 If the firms in a competitive industry incur an economic loss, what happens to the industry supply, the market price, the firm’s output, the number of firms and economic profit?
2 If the firms in a competitive industry earn an economic profit, what happens to the industry supply, the market price, the firm’s output, the number of firms and economic profit?
1 When a firm in perfect competition maximizes its profit, what is the relationship between the firm’s marginal cost, marginal revenue and price?
5 Explain how we derive an industry supply curve?
4 What is the relationship between a firm’s supply curve, its marginal cost curve and its average variable cost curve?
3 What is the largest economic loss that a firm will incur in the short run?
2 What is the lowest price at which a firm will produce its output? Explain why.
1 Why does a firm in perfect competition produce the quantity at which marginal cost equals price?
1 Read about teleworking and then: a What is the short-run impact of introducing teleworking on company costs? b Why does teleworking involve investing in new technology? c What is the long-run
2 A telecommunication company is considering replacing human telephone operators with computers. Create your own example and graph: a The average cost curves and the marginal cost curve when the
1 Read the Business Case Study on pp. 216–217 about the problems of the European airlines and use the links on Parkin Interactive to read the original articles. a What is the main difference
12 The table shows the production function of Cathy’s Cakes. Output (cakes per day) Labour (workers per day) Plant 1 Plant 2 Plant 3 Plant 4 1 20 40 55 65 2 40 60 75 85 3 65 75 90 100 4 65 85 100
*11The table shows the production function of Bonnie’s Balloon Rides. Output (rides per day) Labour (workers per day) Plant 1 Plant 2 Plant 3 Plant 4 1 4 10 13 15 2 10 15 18 21 3 13 18 22 24 4 15
10 In problem 4, suppose that the price of labour decreases to a40 per day. Explain what changes occur to the short-run average and marginal cost curves.
*9 In problem 3, suppose that Rubber Dinghies’ total fixed cost decreases to a800 a week. Explain what changes occur to the short-run average and marginal cost curves.
8 In problem 4, Charlie’s Chocolates buys a second plant and now the total product of each quantity of labour doubles. The total fixed cost of operating each plant is a50 a day. The wage rate is
*7 In problem 3, Rubber Dinghies buys a second plant and now the total product of each quantity of labour doubles. The total fixed cost of operating each plant is a1,000 a week. The wage rate is a400
6 In problem 4, suppose that the price of labour increases to a70 per day. Explain what changes occur to the short-run average and marginal cost curves.
*5 In problem 3, suppose that Rubber Dinghies’ total fixed cost increases to a1,100 a week. Explain what changes occur to the short-run average and marginal cost curves.
4 In problem 2, the price of labour is a50 per day and total fixed costs are a50 per day. a Calculate total cost, total variable cost and total fixed costs for each level of output and draw the
*3 In problem 1, the price of labour is a400 a week and total fixed cost is a1,000 a week. a Calculate total cost, total variable cost and total fixed cost for each output and draw the short-run
2 Charlie’s Chocolates’ total product schedule is: Labour Output (workers per day) (boxes per day) 1 12 2 24 3 48 4 84 5 132 6 192 7 240 8 276 9 300 10 312 a Draw the total product curve. b
*1 Rubber Dinghies’ total product schedule is: Labour Output (workers per week) (rubber boats per week) 1 1 2 3 3 6 4 10 5 15 6 21 7 26 8 30 9 33 10 35 a Draw the total product curve. b Calculate
5 How is a firm’s minimum efficient scale determined?
4 What are economies and diseconomies of scale? How do they arise? What do they imply for the shape of the long-run average cost curve?
3 What does a firm’s long-run average cost curve show? How is it related to the firm’s short-run average cost curve?
2 Does the law of diminishing returns apply to capital as well as labour? Explain.
1 What does a firm’s production function show and how is it related to a total product curve?
5 What are the shapes of the average variable cost curve and average total cost curve and why?
4 What is the shape of the average total cost curve and why?
3 What does the law of diminishing returns imply for the shape of the marginal cost curve?

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