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business
microeconomics

Questions and Answers of Microeconomics

Why does the minimum point of the average-totalcost curve show the quantity at which the firm is most efficiently supplying output in the short run?
Consider a firm with a fixed-size production facility as described by its existing cost curves.a. Explain what would happen to those cost curves if a mandatory health insurance program is imposed on
Does the following statement make sense? ‘‘You made a real blunder. The $600 you paid for repairs is worth more than the car.’’
Explain the statement, ‘‘We had to increase our volume to spread the overhead.’’
Three college students are considering operating a tutoring business in economics. This business would require that they give up their current jobs at the student recreation center, which pay
Express Mail offers overnight delivery to customers. It is attempting to come to some conclusion on whether to expand its facilities. Currently its fixed costs are \($2\) million per month, and its
Suppose the cost of starting Business A is very, very high. But once begun, the marginal cost of additional output is near zero. Draw this situation using the marginal cost curve.
It requires a large sum of money to produce a musical CD. The band has to be formed, practiced, and so forth. The recording studio has to be rented and the music performed and taped. Once one CD has
Use the following to calculate profit at each quantity of output. (Total) Output Price Total Revenue Total Cost (Q) (P) (TR) (TC) 0123456 $1,900 $ 0 $1,000 $1,700 $ 1,700 $2,000 $1,650 $ 3,300 $2,800
Explain the relationship between the shapes of the productivity curves and the shape of the cost curves. Specifically, compare the APP curve with the ATC curve and the MPP curve with the MC curve.
Use the table in exercise 1 to calculate marginal revenue and marginal cost.Data from in exercise 1Use the following to calculate profit at each quantity of output. (Total) Output Price Total Revenue
Use the information in exercises 1 and 2 to graphically show maximum profit. Label the profit maximizing quantity and price, total cost, total revenue, and profit.Data from in exercise 1Use the
Can accounting profit be positive and economic profit negative? Can accounting profit be negative and economic profit positive? Explain.
Calculate accounting profit and economic profit for each of the following firms (amounts are in millions of dollars). General Barclays Motors Bank Microsoft Sales $50,091 $5,730 $2,750 Wages and
Use the following information to calculate accounting profit and economic profit.Sales \($100\) Employee expenses \($40\) Inventory expenses \($20\) Value of owner’s labor in any other enterprise
Which type of market characterizes most businesses operating in the United States today?
Given that a firm in a monopoly has no competitors producing close substitutes, does the monopolist set exorbitantly high prices?
Give 10 examples of differentiated products. Then list as many nondifferentiated products as you can.Which would have the largest price elasticity of demand, the differentiated or the
Use the information in the table to calculate total revenue, marginal revenue, and marginal cost. Indicate the profit-maximizing level of output. If the price was \($3\) and fixed costs were \($5,\)
Try to classify the following firms into one of the four market structure models. Explain your choice.a. Rowena’s gourmet foods (produces and sells a line of specialty foods)b. Shasta Pools & Spas
Draw a demand curve and the corresponding marginal-revenue curve for a firm selling in a monopoly and another firm selling in perfect competition. Explain which demand curve is the most elastic. What
Explain why accounting profit provides very useful information. Explain why economic profit provides very useful information.
Cost figures for a hypothetical firm are given in the following table. Use them for the exercises below.The firm is selling in a perfectly competitive market.a. Fill in the blank columns.b. What is
GM’s net income in 2010 was \($4.7\) billion. What would its accounting profit be if its cost of equity capital was \($5\) billion? What would its economic profit be if its cost of equity capital
Label the curves in the following graph.a. At each market price, P1, P2, and P3, at what output level would the firm produce?b. What profit would be earned if the market price was P1?c. What are the
Why might a firm continue to produce in the short run even though the market price is less than its average total cost?
Explain why the demand curve facing the individual firm in a perfectly competitive industry is a horizontal line.
Explain what occurs in the long run in a constantcost industry, an increasing-cost industry, and a decreasing-cost industry when the market demand declines (shifts in).
What can you expect from an industry in perfect competition in the long run? What will the price be? What quantity will be produced? What will be the relation between marginal cost, average cost, and
Assume that the market for illegal drugs is an example of a perfectly competitive market structure. Describe what the perfectly competitive market model predicts for illegal drugs in the long run.
If no real-life industry meets the conditions of the perfectly competitive model exactly, why do we study perfect competition? What is the relevance of the model to a decision to switch careers? How
Using the model of perfect competition, explain what it means to say, ‘‘Too much electricity is generated,’’ or ‘‘Too little education is produced.’’ Would the firm be producing at
Private swimming pools can be dangerous. There are serious accidents each year in those areas of the United States where backyard pools are common. Should pools be banned? In other words, should the
Discuss whether the following are examples of perfectly competitive industries.a. The U.S. stock marketb. The automobile industryc. The consumer electronics marketd. The market for college students
Macy’s was making millions of dollars in profits when it declared bankruptcy. Explain Macy’s decision.
Use the following data for the exercises below.a. What is the equilibrium price and quantity?b. Draw the demand and supply curves. If this represents perfect competition, are the curves
Use the model of perfect competition to explain the rise in corn prices from \($1\) per bushel in 2004 to \($6\) per bushel in 2011.
Draw a demand and supply diagram and illustrate what gains from trade are.
In exercise 16, explain why this illustrates gains from trade and what the gains mean for consumers and for producers.Data from in exercise 16Draw a demand and supply diagram and illustrate what
Entry and exit of firms occur in the long run, but not in the short run. Why? What is meant by the long run and the short run? Would you say that entry is more or less difficult than exit?
About 85 percent of the soup sold in the United States is Campbell’s brand. Is Campbell Soup Company a monopoly firm?
Price discrimination is practiced by movie theaters, motels, golf courses, drugstores, and universities. Are they monopolies? If not, how can they carry out price discrimination?
Why is it necessary for the seller to be able to keep customers from reselling the product in order for price discrimination to occur? There are many products for which you get a discount for
Many people have claimed that there is no good for which substitutes are not available. If so, does this mean there is no such thing as monopoly?
Suppose that at a price of \($6\) per unit, quantity demanded is 12 units. Calculate the quantity demanded when the marginal revenue is \($6\) per unit.
In the following figure, if the monopoly firm faces ATC1, which rectangle measures total profit? If the monopoly firm faces ATC2, what is total profit? What information would you need in order to
In recent years, U.S. car manufacturers have charged lower prices for cars in western states in an effort to offset the competition from Japanese cars. This twotier pricing scheme has upset many car
Consider the following demand schedule. Does it apply to a perfectly competitive firm? Compute marginal and average revenue. Price Quantity Price Quantity $95 2 $55 5 $88 3 $40 6 $80 4 $22 7
Suppose the marginal cost of producing the good in question 8 is a constant $10 per unit of output. What quantity of output will the firm produce?Data from in question 8Consider the following demand
Do you agree or disagree with this statement: ‘‘A monopoly firm will charge an exorbitant price for its product’’? Explain your answer.
Do you agree or disagree with this statement: ‘‘A monopoly firm will run a much less safe business than a perfect competitor’’? Explain your answer.
State colleges and universities have two levels of tuition or fees. The less expensive is for residents of the state; the more expensive is for nonresidents. Assume that the universities are
Several electric utilities are providing customers with a choice of billing procedures. Customers can select a time-of-day meter that registers electric usage throughout the day, or they can select a
Suppose that a firm has a monopoly on a good with the following demand schedule.a. What price and quantity will the monopolist produce at if the marginal cost is a constant $4?b. Calculate the
Describe how ‘‘quantity discounts’’ can be price discrimination.
Illustrate with a perfectly competitive market (demand and supply) diagram what ‘‘gains from trade’’ are. Now introduce a marginal revenue curve, thereby converting the perfectly competitive
Disney, Universal, and MGM, among others, have movie studios in Hollywood. Each of these major studios also has one or several subsidiary studios. Disney, for example, has Touchstone. What market
Suppose that Disney was experiencing above normal profits. If Disney is a member of a monopolistically competitive industry, what would you predict would happen to the demand curve for Disney movies
Why is monopolistic competition said to be inefficient? Suppose that you counted the higher price the consumer pays for the monopolistically competitive firm’s product as part of consumer surplus.
Why might some people claim that the breakfast cereal industry is monopolistically competitive but that the automobile industry is an oligopoly? In both cases, about eight to ten firms dominate the
The graph that follows shows an individual firm in long-run equilibrium. In which market structure is this firm operating? Explain. Compare the long-run quantity and price to those of a perfectly
Explain what is meant by strategic behavior.
The NCAA is described as a cartel. In what way is it a cartel? What is the product being produced? How does the cartel stay together?
Almost every town has at least one funeral home, even if the number of deaths could not possibly keep the funeral home busy. What market structure does the funeral home industry best exemplify? Use
What is the cost to a firm in an oligopoly that fails to take rivals’ actions into account?
Suppose a firm in monopolistic competition has the demand schedule shown in the following table. Suppose the marginal cost is a constant $70. How much will the firm produce? Is this a long-or
The cement industry is an example of an undifferentiated oligopoly. The automobile industry is a differentiated oligopoly. Which of these two is more likely to advertise? Why?
The South American cocaine industry consists of several ‘‘families’’ that obtain the raw material, refine it, and distribute it in the United States. There are only about three large
Use the payoff matrix below for the following exercises. The payoff matrix indicates the profit outcome that corresponds to each firm’s pricing strategy.a. Firms A and B are members of an
What is the purpose of a brand name? What would occur if any maker of aspirin could put a Bayer Aspirin label on its product?
Explain the difference between a dominant strategy and a Nash equilibrium.
Explain why repeated interactions tends to break down the solution of a prisoners’ dilemma. Why does the dilemma go away?
Using the average-total-cost and marginal-cost curves, demonstrate what huge fixed costs and near-zero marginal costs mean for the average total-cost curve.
Explain why an externality might be a market failure. What does market failure mean?
Using the demand and cost curves of an individual firm in oligopoly, demonstrate the effects of each of the following:a. The Clean Air Actb. The Nutrition and Labeling Actc. A ban on smoking inside
Kodak has developed an important brand name through its advertising, innovation, and product quality and service. Suppose Kodak sets up a network of exclusive dealerships, and one of the dealers
Explain why a market in which broadcast licenses can be purchased might be more efficient than having the FCC assign licenses on some basis designed by the FCC.
Which of the three types of government policies—antitrust, social regulation, and economic regulation—is the basis for each of the following?a. Beautician education standardsb. Certified Public
Some airline executives have called for reregulation. Why might an executive of an airline prefer to operate in a regulated environment?
Suppose the Herfindahl index for domestic production of televisions is 5,000. Does this imply a very competitive or a noncompetitive environment?
Suppose a monopolist is practicing price discrimination and a lawsuit against the monopolist forces an end to the practice. Is it possible that the result is a loss in efficiency? Explain.
The Justice Department sued several universities for collectively setting the size of scholarships offered. Explain why the alleged price fixing on the part of universities might be harmful to
The FDA is considering the adoption of a higher standard of success in clinical trials for any pharmaceutical that the agency will permit to be sold in the United States. Explain how a cost–benefit
Suppose that in exercise 10, the benefits of the regulation were 1,000 lives saved per year. Would you support adoption of the regulation? Explain.Data from in exercise 10The FDA is considering the
Explain what the costs of the regulation are in the scenario in exercises 10 and 11.Data from in exercise 10The FDA is considering the adoption of a higher standard of success in clinical trials for
What does a loss of consumer surplus mean? In the case of exercises 10–12, exactly how do the losses of consumer surplus occur?Data from in exercise 10The FDA is considering the adoption of a
Go to http://www.heritage.org and find the Economic Freedom map. Use the map to determine the most economically free continent and the least economically free continent. Then do a search to find out
What is the pattern of U.S. government as a share of the total economy since the 1900s?
What is government debt? Why has it increased or decreased?
Is the United States the nation with the most government debt? If not, who is?
How would you derive the demand for milk at the local grocery store? How would you derive the demand for tuna? How would you derive the demand for national defense?
Use the accompanying table to answer the following questions.a. What is the external cost per unit of output?b. What level of output will be produced?c. What level of output should be produced to
What level of tax would be appropriate to internalize the externality in exercise 3?Data from in exercise 3Use the accompanying table to answer the following questions.a. What is the external cost
If the private cost and social cost columns were reversed in exercise 3, what would be the result?Would too much or too little of the good be produced?How would the market failure be resolved, by a
What is meant by the term overfishing? What is the fundamental problem associated with overfishing of the oceans? What might lead to underfishing?
Suppose the following table describes the marginal costs and marginal benefits of waste (garbage)reduction. What is the optimal amount of garbage?What is the situation if no garbage is allowed to be
How much pollution would exist if all externalities were internalized? Why would it not be zero? Use the same explanation to discuss the amount of health and safety that the government should require
Elephants eat 300 pounds of food per day. They flourished in Africa when they could roam over huge areas of land, eating the vegetation in one area and then moving on so that the vegetation could
Explain why the value of pollution permits in one area of the country rose 20 percent per year, while in another remained unchanged from year to year?What would you expect to occur as a result of
Smokers impose negative externalities on nonsmokers. Suppose the air in a restaurant is a resource owned by the restaurant owner.a. How would the owner respond to the negative externalities of

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