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microeconomics

Questions and Answers of Microeconomics

e. How does the monopsony power of this firm in the labor market create a divergence between labor supply and the firm’s marginal cost of labor, just as the monopoly power of a firm causes a
d. We are assuming that the firm has to pay all its workers the same wage; that is, it cannot wage discriminate. Does that imply that the marginal cost of hiring the second unit of labor is greater
23.6* Business and Policy Application: Monopsony: A Single Buyer in the Labor Market: The text treated extensively the case where market power is concentrated on the supply side, but it could equally
e. Given the fixed cost to operating in the industry, would you expect the number of firms in the industry to go up or down?
d. Can you verify your answer by instead finding MR and MC from the perspective of the union and then setting these equal to one another?
B. * Suppose that each firm in the industry has the same technology described by the production function f1,2 5 A, a with a , 1, and suppose that there is some recurring fixed cost to operating in
e. If all firms in the industry are becoming unionized, what impact will this have on employment in this industry? Illustrate this in your market graph.f. Suppose that those workers not chosen to be
d. * Suppose that the union that is negotiating with the firm in your graph is exercising its market power with an aim of maximizing the overall gain for its members. Suppose further that the union
23.5 Business and Policy Application: Labor Unions Exercising Market Power: Federal antitrust laws prohibit many forms of collusion in price setting between firms. Labor unions, however, are exempt
h. At what value for g will type 2 consumers no longer buy insurance? If we interpret the difference in types as a difference in incomes (as outlined in the appendix), can you determine which form
g. Determine the value for p when g 5 0. Does your answer make intuitive sense? What about when g 5 0.1, when g 5 0.2, and when g 5 0.25? True or False: As the fraction of type 1 consumers increases,
f. For both cases, that is, for MC2 , p , MC1 and when MC1 , p , 10, set up the optimization problem the second degree price-discriminating monopolist solves to determine p. Then solve for p in terms
e. Given that the fraction of type 1 consumers is g (and the fraction of type 2 consumers is 11 2 g2 2, what is the expected profit E1p1p2 2 per customer from setting p 2 5 p when MC2 , p , MC1? What
d. Suppose instead that MC1 , p , 10. What would now be the largest possible F 1that is consistent with type 1 consumers not buying the type 2 insurance (assuming still that p1 5 MC1 5 8?) (Hint: Use
c. Suppose MC2 , p , MC1. For p in that range, what is the largest possible F 1that the monopolist can charge to type 1 consumers if she sets p 1 5 MC1 5 8? (Hint: Draw the graph with the two demand
B.**Consider again the set-up in part B of exercise 23.3. Suppose that a fraction g of the population is of type 1, with the remainder 11 2 g2 of type 2. In analyzing second degree price
f. True or False: Under second degree price discrimination, the most likely to not buy any health insurance are the relatively healthy and the relatively young.
e. Illustrate how a second degree price-discriminating monopolist would now structure the two health insurance packages to maximize profit. Might relatively healthy individuals no longer be offered
d. Suppose next that the demand from type 1 consumers is greater than the demand from type 2 consumers, with d 1intersecting MC1 to the right of where d 2intersects MC2. Would anything fundamental
b. Under second degree price discrimination, the monopolist does not know who is what type.What two packages of insurance level x and price P (that can have a per-unit price plus a fixed charge) will
23.4* Business and Policy Application: Second Degree Price Discrimination in Health Insurance Markets: In exercise 23.3, we analyzed the case of a monopoly health insurance provider. We now extend
g. Suppose g 5 0.5; that is, half of the population is type 1 and half is type 2. Can you rank the three scenarios in (c), (d), and (e) from most efficient to least efficient?h. Can you rank them in
e. How do your answers to (d) change if the monopolist third degree price discriminates?f. Let the payment that individual n makes to the monopolist be given by P n 5 F n 1 p nx n. Express your
d. Suppose that the monopolist first degree price discriminates. How much insurance will each consumer type purchase? How much will each type pay for his coverage?
c. What would the monopoly price be if g 5 0? What if g 5 2/ 7? What is the highest that g can be and still result in type 2 consumers buying insurance?
b. If a monopolist cannot tell who is what type and can only charge a single per-unit price for insurance, what will she do assuming there are g type 1 consumers and 11 2 g2 type 2 consumers, with
a. Determine the efficient level of insurance for each consumer type.
B. Suppose next that we normalize the units of health insurance coverage such that the demand function is x n1p2 5 1un 2 p2/un for type n. You can interpret x 5 0 as no insurance and x 5 1 as full
g. Would it improve average consumer surplus to prohibit the monopolist from third-degree price discriminating? Would it be more efficient?
f. In the text, we suggested that it is generally not possible without knowing the specifics of a case whether third degree price discrimination is more or less efficient than no price
23.3 Business and Policy Application: Monopoly Pricing in Health Insurance Markets: In Chapter 22, we worked with models in which high and low cost customers compete for insurance. Consider the level
g. What if instead b 5 21?
f. Suppose b 5 0.5 and MC 5 x. What is the profit-maximizing diamond size now?
e. Suppose the diamond monopoly has recurring fixed costs that are sufficiently high to cause its profits to be zero. If marginal costs were zero, what would be the relationship between the demand
d. If MC 5 0, how large a diamond size per engagement ring is consistent with profit maximization (assuming the claim holds)?
c. Derive the marginal revenue function (assuming the claim holds). Assuming MC . 0, does MR ever cross MC?
b. How much revenue will the diamond monopoly earn if the claim holds? Does this depend on what price it sets?
a. What value must b take in order for the claim to be correct?
B. Suppose that demand for diamond size is x 5 1A/p2 11/112b22.
f. True or False: By observing the actual size of diamonds in engagement rings, we can conclude that either the market campaign has not yet fully succeeded or the diamond industry is not really a
e. How large would the diamonds in engagement rings be if the marketing campaign to convince us of the claim at the beginning of the question was fully successful and if the diamond industry really
d. What price is consistent with profit maximization?
c. What price per karat would be consistent with the diamond monopoly maximizing its revenues(assuming the claim accurately characterizes demand)?
b. If this claim is true, what is the price elasticity of demand for diamonds?
23.2 Everyday and Business Application: Diamonds Are a Girl’s Best Friend: Historically, most of the diamond mines in the world have been controlled by a few companies and governments. Through
h. How does the profit maximization problem change if the recurring fixed costs are half of what we assumed in part (e)? Does the solution to the problem change?
g. Does the average cost curve relate to the demand curve as you concluded in part A(f)?
f. Use this cost function to set up the monopolist’s optimization problem and verify your answers to (b).
e. What is the cost function if recurring fixed costs are sufficiently high to cause the monopolist’s profit to be zero?
d. What is consumer surplus and deadweight loss (assuming that demand is equal to marginal willingness to pay)?
B. Consider again the demand curve and MC curve as specified at the beginning of this exercise.a. Derive the equation for the marginal revenue curve.b. What is the profit-maximizing output level x M
23.1 Suppose that the demand curve for a product x provided by a monopolist is given by p 5 90 2 x and suppose further that the monopolist’s marginal cost curve is given by MC 5 x.A. In this part,
In Table 23.1, we note that there are no restrictions on per-unit prices for the two consumer types under either first or second degree price discrimination, with firms being able to tell consumer
Explain all the zeros in Table 23.2.
Can you think of any definitive policy implications if the goal of policy is to maximize consumer welfare(with no regard to firm profit)?
Can you give an intuitive explanation for why this has to hold?
Can you think of a scenario under which all the inequalities turn to equalities in equations (23.44) and (23.45)? (Hint: Think of goods for which consumers demand only 1 unit.)
From looking at Table 23.1, it seems that the firm is unambiguously less restricted in its pricing under second degree price discrimination than under third degree price discrimination. So how could
If the monopolist is restricted to offering a single two-part tariff (rather than two separate tariffs intended for the two consumer types), is she more or less likely to forego second degree price
Why is the expected profit from the single two-part tariff developed in the previous section 1a 1 b 1 11 2 g2 1c 1 e2 2 ?
Why is F 2 5 1a 1 b 1 c 1 d2 the highest possible fixed fee the firm can charge to type 2 consumers given that it sets per-unit prices at MC and charges type 1 F 1 5 1a 1 b 1 c2 ?
Explain why, for the preferences we have been working with, the two demand curves have the same horizontal intercept.
Given that you know how the firm constructed the two-part tariff, can you give an intuitive explanation for this?
Derive the price charged to consumer n by a third-degree price discriminating monopolist with constant marginal cost c.
Intuitively, why does the fixed charge F from the two-part tariff not show up in the demand function?
True or False: The higher-priced market under (third degree) price discrimination is more price inelastic.
Verify that equation (23.22) holds for this example. (Be sure to evaluate elasticities at the profitmaximizing output levels.)
Illustrate graphically the two different parts of the two-part tariff in equation (23.17).
Verify for the example of our linear demand curve and constant marginal cost c that it does not matter whether the firm maximizes profit by choosing x or p (as in the problems defined in equations
Can you use equation (23.10) to now prove that, so long as MC . 0, the monopolist will produce where eD , 21 ?
Set up a revenue maximization problem for the firm. Then verify that this is indeed the revenuemaximizing output level and that, at that output, eD 5 21.
Explain why the cost minimization problem in the firm’s duality picture of Chapter 13 is identical for firms regardless of whether they are monopolies or perfect competitors.
Suppose the technology is such that AC is U-shaped but the upward-sloping part of the U-shape happens at an output level that is high relative to market demand. Can the same “natural
Can you see in Graph 23.6a that a price-taking firm facing a downward-sloping AC curve would produce either no output or an infinite amount of the output depending on what the price is?
In Chapter 22, we analyzed situations in which there is asymmetric information between consumers and producers (as in the insurance market). Can you see how the problems faced by an insurance company
We have assumed in our example that there is an equal number of type 1 and type 2 consumers in the economy. How would our analysis change if the monopolist knew that there were twice as many type 1
What price will the profit-maximizing monopolist charge for x* and for 200 units in panel (c) of Graph 23.5?
Why would the monopolist not be able to offer two per-unit prices as in Graph 23.4?
We simplified the analysis by assuming that each person will buy only one piece of art. How would you extend the idea of perfect price discrimination (resulting in demand being equal to marginal
True or False: If demand were not equal to marginal willingness to pay (due to the presence of income effects on the consumer side), the deadweight loss area may be larger or smaller but would
True or False: In the presence of negative production externalities, a monopolist may produce the efficient quantity of output.
True or False: Depending on the shape of the MC curve, the efficient output level might lie on the elastic or the inelastic portion of the demand curve.
Suppose that demand is as depicted in Graph 23.1 and MC 5 0. What is the monopolist’s profitmaximizing output level and what is the efficient output level? What if MC 5 300?
Suppose a deep freeze causes the Florida orange crop to be reduced by 50%, which causes the price for oranges to increase. as a result, we observe that the total revenues of Florida orange growers
Suppose MC is equal to $200 for all quantities for a monopolist who faces a market demand curve of the type in Graph 23.1. at what point on the demand curve will she choose to produce?
True or False: If recurring fixed costs are $40,000, then the monopolist will earn $80,000 in short-run economic profit and $40,000 in long-run economic profit.
i. Insurance companies charge higher insurance rates to young drivers than to middle-aged drivers. How is their behavior similar to the behavior by law enforcement that searches pick-up trucks more
h. Why is your answer to (d) different than your answer to (g)?
g. How many illegal substance interdictions per day would on average occur if the police conducted random searches instead of what you derived in (d)?
f. If the police conducted random searches, what would be the probability of finding illegal substances in each of the two vehicle types? How does this compare to your answer to (c)?
e. How many of each type of car would on average be searched each day if the police instead searched vehicles randomly?
d. If law enforcement officials search trucks and cars at the rates you derived in (b), how many illegal substance interdictions would on average occur every day?
c. If law enforcement conducts searches as calculated in (b), what is the probability of interdicting illegal substances in pick-up trucks? What is the probability of interdicting such substances in
b. According to the police’s objective function, how many trucks should be searched per day?How many passenger vehicles?
a. Suppose that the objective of the police is to maximize the number of interdictions of illegal substances. Write down the optimization problem, with nt and nc as choice variables and the
B. Suppose that the police force has sufficient resources to conduct 100 car searches per day and that half of all vehicles are pick-up trucks and half are passenger cars. The probability of finding
g. We have used the emotionally neutral categories of “pick-up trucks” and “passenger vehicles.” Now consider the more empirically relevant case of “minority neighborhoods”
f. Could it be the case that d . g and the police show behavior inherently biased against passenger cars?
e. What would have to be true about the average yield of illegal substances per search for the different types of vehicles for you to argue that the police were inherently biased against pick-up
d. If you simply observe that d . g, can you conclude that the police are inherently biased against pick-up trucks owners? Why or why not?

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