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principles of microeconomics

Questions and Answers of Principles Of Microeconomics

29. 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
28. 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
27. 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
26. Why are generic pharmaceuticals significantly cheaper than name brand ones?
25. ALCOA does not have the monopoly power it once had. How do you suppose their barriers to entry were weakened?
24. How does the quantity produced and price charged by a monopolist compare to that of a perfectly competitive firm?
23. Is a monopolist allocatively efficient? Why or why not?
22. When a monopolist identifies its profit-maximizing quantity of output, how does it decide what price to charge?
21. How can a monopolist identify the profitmaximizing level of output if it knows its marginal revenue and marginal costs?
20. How can a monopolist identify the profitmaximizing level of output if it knows its total revenue and total cost curves?
19. What is the usual shape of a marginal revenue curve for a monopolist? Why?
18. What is the usual shape of a total revenue curve for a monopolist? Why?
17. Is a monopolist a price taker? Explain briefly.
16. How does the demand curve perceived by a monopolist compare with the market demand curve?
15. How is the demand curve perceived by a perfectly competitive firm different from the demand curve perceived by a monopolist?
14. In what sense is a natural monopoly “natural”?
13. By what legal mechanisms is intellectual property protected?
12. How is intellectual property different from other property?
11. What is predatory pricing?
10. What is a legal monopoly?
9. What is a natural monopoly?
8. What is a barrier to entry? Give some examples.
7. How is monopoly different from perfect competition?
6. Imagine a monopolist could charge a different price to every customer based on how much he or she were willing to pay. How would this affect monopoly profits?
5. Suppose demand for a monopoly’s product falls so that its profit-maximizing price is below average variable cost.How much output should the firm supply? Hint: Draw the graph.
4. If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development?
3. Suppose the local electrical utility, a legal monopoly based on economies of scale, was split into four firms of equal size, with the idea that eliminating the monopoly would promote competitive
2. Classify the following as a government-enforced barrier to entry, a barrier to entry that is not governmentenforced, or a situation that does not involve a barrier to entry.a. A city passes a law
1. Classify the following as a government-enforced barrier to entry, a barrier to entry that is not governmentenforced, or a situation that does not involve a barrier to entry.a. A patented
41. A computer company produces affordable, easy-touse home computer systems and has fixed costs of $250.The marginal cost of producing computers is $700 for the first computer, $250 for the second,
40. Perfectly competitive firm Doggies Paradise Inc.sells winter coats for dogs. Dog coats sell for $72 each.The fixed costs of production are $100. The total variable costs are $64 for one unit, $84
39. The AAA Aquarium Co. sells aquariums for $20 each. Fixed costs of production are $20. The total variable costs are $20 for one aquarium, $25 for two units, $35 for the three units, $50 for four
38. In the argument for why perfect competition is allocatively efficient, the price that people are willing to pay represents the gains to society and the marginal cost to the firm represents the
37. Assuming that the market for cigarettes is in perfect competition, what does allocative and productive efficiency imply in this case? What does it not imply?
36. Why will losses for firms in a perfectly competitive industry tend to vanish in the long run?
35. Why will profits for firms in a perfectly competitive industry tend to vanish in the long run?
34. Many firms in the United States file for bankruptcy every year, yet they still continue operating. Why would they do this instead of completely shutting down?
33. Since a perfectly competitive firm can sell as much as it wishes at the market price, why can the firm not simply increase its profits by selling an extremely high quantity?
32. Your company operates in a perfectly competitive market. You have been told that advertising can help you increase your sales in the short run. Would you create an aggressive advertising campaign
31. Can you name five examples of perfectly competitive markets? Why or why not?
30. Finding a life partner is a complicated process that may take many years. It is hard to think of this process as being part of a very complex market, with a demand and a supply for partners.
29. Will a perfectly competitive market display allocative efficiency? Why or why not?
28. Will a perfectly competitive market display productive efficiency? Why or why not?
27. What price will a perfectly competitive firm end up charging in the long run? Why?
26. Do entry and exit occur in the short run, the long run, both, or neither?
25. Why does exit occur?
24. Why does entry occur?
23. What two lines on a cost curve diagram intersect at the shutdown point?
22. How does the average variable cost curve help a firm know whether it should shut down immediately?
21. Should a firm shut down immediately if it is making losses?
20. What two lines on a cost curve diagram intersect at the zero-profit point?
19. How does the average cost curve help to show whether a firm is making profits or losses?
18. What two rules does a perfectly competitive firm apply to determine its profit-maximizing quantity of output?
17. Briefly explain the reason for the shape of a marginal revenue curve for a perfectly competitive firm.
16. How does a perfectly competitive firm calculate total revenue?
15. What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?
14. How does a perfectly competitive firm decide what price to charge?
13. What is a “price taker” firm?
12. What are the four basic assumptions of perfect competition? Explain in words what they imply for a perfectly competitive firm.
11. A single firm in a perfectly competitive market is relatively small compared to the rest of the market. What does this mean? How “small” is “small”?
10. Explain how the profit-maximizing rule of setting P = MC leads a perfectly competitive market to be allocatively efficient.
9. Productive efficiency and allocative efficiency are two concepts achieved in the long run in a perfectly competitive market. These are the two reasons why we call them “perfect.” How would you
8. A market in perfect competition is in long-run equilibrium. What happens to the market if labor unions are able to increase wages for workers?
7. If new technology in a perfectly competitive market brings about a substantial reduction in costs of production, how will this affect the market?
6. A firm’s marginal cost curve above the average variable cost curve is equal to the firm’s individual supply curve.This means that every time a firm receives a price from the market it will be
5. Explain in words why a profit-maximizing firm will not choose to produce at a quantity where marginal cost exceeds marginal revenue.
4. Suppose that the market price increases to $6, as shown in Table 8.14. What would happen to the profitmaximizing output level? Total Fixed Variable Marginal Total Marginal Quantity Cost Cost Cost
3. Look at Table 8.13. What would happen to the firm’s profits if the market price increases to $6 per pack of raspberries? Quantity Total Cost Fixed Cost Variable Cost Total Revenue Profit 0 $62
2. Would independent trucking fit the characteristics of a perfectly competitive industry?
1. Firms in a perfectly competitive market are said to be “price takers”—that is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a
34. A small company that shovels sidewalks and driveways has 100 homes signed up for its services this winter. It can use various combinations of capital and labor: lots of labor with hand shovels,
33. Compute the average total cost, average variable cost, and marginal cost of producing 60 and 72 haircuts.Draw the graph of the three curves between 60 and 72 haircuts.
32. Return to Figure 7.3. What is the marginal gain in output from increasing the number of barbers from 4 to 5 and from 5 to 6? Does it continue the pattern of diminishing marginal returns?
31. A firm is considering an investment that will earn a 6% rate of return. If it were to borrow the money, it would have to pay 8% interest on the loan, but it currently has the cash, so it will not
30. Do you think that the taxicab industry in large cities would be subject to significant economies of scale? Why or why not?
29. How would an improvement in technology, like the high-efficiency gas turbines or Pirelli tire plant, affect the long-run average cost curve of a firm? Can you draw the old curve and the new one
28. It is clear that businesses operate in the short run, but do they ever operate in the long run? Discuss.
27. Average cost curves (except for average fixed cost)tend to be U-shaped, decreasing and then increasing.Marginal cost curves have the same shape, though this may be harder to see since most of the
26. How does fixed cost affect marginal cost? Why is this relationship important?
25. A common name for fixed cost is “overhead.” If you divide fixed cost by the quantity of output produced, you get average fixed cost. Supposed fixed cost is$1,000. What does the average fixed
24. Small “Mom and Pop firms,” like inner city grocery stores, sometimes exist even though they do not earn economic profits. How can you explain this?
23. Why will firms in most markets be located at or close to the bottom of the long-run average cost curve?
22. What shape of a long-run average cost curve illustrates economies of scale, constant returns to scale, and diseconomies of scale?
21. What is the difference between economies of scale, constant returns to scale, and diseconomies of scale?
20. What is a long-run average cost curve?
19. In choosing a production technology, how will firms react if one input becomes relatively more expensive?
18. What is a production technology?
17. What shapes would you generally expect each of the following cost curves to have: fixed costs, variable costs, marginal costs, average total costs, and average variable costs?
16. How is each of the following calculated: marginal cost, average total cost, average variable cost?
15. Which costs are measured on per-unit basis: fixed costs, average cost, average variable cost, variable costs, and marginal cost?
14. What are diminishing marginal returns as they relate to costs?
13. Are fixed costs also sunk costs? Explain.
12. Are there fixed costs in the long-run? Explain briefly.
11. What is the difference between fixed costs and variable costs?
10. What is the difference between accounting and economic profit?
9. Would an interest payment on a loan to a firm be considered an explicit or implicit cost?
8. What are explicit and implicit costs?
7. Automobile manufacturing is an industry subject to significant economies of scale. Suppose there are four domestic auto manufacturers, but the demand for domestic autos is no more than 2.5 times
6. 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?
5. Return to the problem explained in Table 7.4 and Table 7.5. If the cost of labor remains at $40, but the cost of a machine decreases to $50, what would be the total cost of each method of

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