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business
principles of microeconomics

Questions and Answers of Principles Of Microeconomics

25 How can potential competition reduce the deadweight loss of a monopolist? (page 261)
24 How can competition reduce the deadweight loss of a monopolist? (page 260)
23 How do you graphically determine the deadweight loss of a monopolist? (pages 258–259)
22 Do monopolists produce at the low point on their average total cost curves? (page 255)
21 How can you graphically determine a monopolist’s price and output? (page 255)
20 How will a monopolist set output? (page 254)
19 For firms in perfect competition, marginal revenue equals price. Why does marginal revenue not equal price for a monopolist that can’t price discriminate? (page 253)
18 Why must a monopolist who can’t price discriminate give a discount to old customers if it wants to sell to new customers? (page 252)
17 Can monopolists circumvent the Law of Demand? (page 252)
16 How do patents relate to Adam Smith’s invisible hand? (page 252)
15 Why do patents promote innovation? (pages 251–252)
14 Why do copyright laws promote the publication of books? (page 251)
13 What are natural monopolies? (pages 250–251)
12 How can economies of scale create a barrier to entry? (pages 250–251)
11 How can sports leagues use incompatibility to erect a barrier to entry? (page 250)
10 What is the popularity trap? (pages 249–250)
9 How can software incompatibility provide a barrier to entry? (page 249)
8 What are some examples of how control of a vital resource leads to monopoly? (page 249)
7 What is the main weapon unions use against firms? (pages 248–249)
6 How can unions increase the salaries of their members? (pages 248–249)
5 What effect does a religious monopoly have on clergy members’ incentives to work hard? (page 248)
4 Why do lawyers and teachers support strong professional licensing requirements? (page 247)
3 Why are government-created barriers to entry so strong? (page 246)
2 What are barriers to entry? (page 246)
1 When is a firm considered to have a monopoly? (page 246)
4 If given the power to regulate the market, would imperfect, self-interested politicians improve or worsen the outcome?
3 How, theoretically, could politicians who are altruistic and omniscient overcome the market challenge?
2 How and to what extent could consumers and firms overcome the challenge?
1 How does each market challenge prevent Adam Smith’s invisible hand from operating?
9 Should firms always seek to minimize their average total costs?
8 The following shows incorrect cost curves for a firm in perfect competition in the long run. Find everything wrong with the diagram. $ Average total cost Marginal cost Average variable costs Firm's
7 Argue that assumption 7 (page 221) follows from the other six perfect competition assumptions.
6 You find out that your boyfriend/girlfriend cheated on you. You tell your boyfriend/girlfriend that you’re terminating the relationship. But he/she is an economics major and so explains that
5 You have already spent $60 million making a movie. It will cost you another$X million to finish the film. You somehow know that the movie will take in exactly $70 million in revenue. For what
4 A firm can make either watches or clocks, but not both. It is currently making an economic profit of $93,000 a year making watches. If it stopped making watches and started making clocks, it would
3 Assume that for firms with cost curves like those in Figure 9.13 , the average total cost of producing all levels of good suddenly falls. (Before this decrease in costs, the market was in a
2 There are 20,000 firms in a perfectly competitive market that until today was in a long-run equilibrium. The price of the good in this market had been $50 and each firm used to make 27 goods.
1 A firm in perfect competition produces 1,000 goods. The total cost of producing these goods is $180,000. The price of each good is $200. In the short run is the firm making a profit? What will
17 Why has the Internet moved the economy closer to perfect competition?(pages 239–240)
16 Why is there limited innovation in perfect competition? (pages 238–239)
15 Why does Adam Smith’s invisible hand work perfectly if price equals marginal cost? (page 238)
14 Why will a society produce the optimal number of goods if price equals marginal cost? (pages 237–238)
13 What is the social benefit of firms in the long run being on the low point of their average total cost curves? (page 237)
12 Why do firms in perfect competition in the long run make zero profit?(page 234)
11 What’s the difference between how economists and accountants calculate profit? (page 233)
10 When will a firm in perfect competition enter or exit its industry? (pages 233–234)
9 What’s the difference between shutting down and exiting a market? (page 232)
8 How can you graphically show when in the short run (a) a firm will operate at a profit, (b) a firm will operate at zero profit, (c) a firm will operate at a loss, and(d) a firm will shut down?
7 When will a firm in perfect competition shut down? (pages 230–231)
6 Why should rational people ignore sunk costs when making decisions?(pages 228–230)
5 What are sunk costs? (pages 228–230)
4 How do you graphically use the price and average total cost curves to determine if a firm is (a) making a positive profit, (b) operating at a loss, and (c) making zero profit? (pages 227–228)
3 How do you graphically determine profits using the price and average total cost curve? (page 227)
2 How do firms in perfect competition set output? (pages 225–226)
1 What are the seven assumptions of perfect competition? (page 221)
12 Moral question: Do pharmaceutical companies have a moral duty to develop treatments for diseases that afflict only poor people?
11 “A tourist in New York’s Greenwich Village had his portrait sketched by a sidewalk artist, who charged him $100. ‘That’s expensive,’ the tourist said. ‘But it’s a great sketch, so
10 A pharmaceutical company makes the hypothetical AIDS drug Zxyran. The marginal cost of making a Zxyran pill is always $1. The pharmaceutical company sells these AIDS pills for $50 each. The
9 In the following table, fill in the blanks with numbers that are consistent with the other numbers in the table. Assume that in the long run the firm can have only one, two, three, or four
8 On the same diagram, draw four short-run average total costs curves for a firm that faces increasing marginal costs. Now use the short-run average total costs curves to find the firm’s long-run
7 If average fixed costs are always decreasing, can average total costs ever be increasing?
6 If marginal costs are always increasing, can average total costs ever be decreasing?
5 Can long-run average total costs ever be greater than short-run average total costs?
4 The average total cost of producing 1,000 goods is $18. What is the total cost of producing 1,000 goods?
3 What happens to the difference between average total costs and average variable costs as output increases?
2 Can average variable costs ever be higher than average total costs?
1 For some products, such as music distributed over the Internet, marginal costs are zero. Do these products exhibit (a) constant returns to scale, (b) increasing returns to scale, or (c) decreasing
14 Why do we expect to sometimes observe diseconomies of scale? (pages 214–215)
13 Why do we expect to sometimes observe economies of scale? (pages 214–215)
12 What are constant returns to scale, economies of scale, and diseconomies of scale? (pages 213–214)
11 Why was Malthus wrong? (pages 209–210)
10 Why did Thomas Malthus predict mass starvation? (page 209)
9 Why does the marginal costs curve go through the low point on the average total costs curve when marginal costs are increasing? (pages 207–208)
8 Why do increasing average variable costs cause the average total costs curve to have a U shape? (page 206)
7 Why do increasing marginal costs cause increasing average variable costs? (pages 205–206)
6 Why do diminishing marginal returns cause increasing marginal costs? (page 205)
5 Why can fixed inputs cause diminishing marginal returns? (pages 204–205)
4 What is the advantage to the U.S. military of allowing advanced fighter jets to be exported? (page 201)
3 Why are large-budget movies usually superficial? (pages 200–201)
2 Why do poor African AIDS victims “benefit” when their disease is shared by rich people? (page 200)
1 Why is international trade important to pharmaceutical companies?(pages 199–200)
10 Moral Question: You are the president of an American company that is considering opening a factory in Bangladesh that will employ 30,000 poor workers. Assume that if you open the factory you could
9 In the textbook I wrote, “If we assume that most parents love their children, then we need to accept that when poor parents send their kids to work they have probably acted in the best interests
8 This chapter listed four additional benefits of trade. Make the argument that additional benefit #4 (Brain Gain) is really an example of additional benefit #1(Specialization).
7 The country that the United States trades with the most is Canada. Why do you think this is, and what does this tell you about international trade?
6 If every human was born with the exact same abilities and resources, would there be any reason to trade?
5 Evaluate the reasonableness of the following statement: “A patriotic American should buy only American-made goods. After all, when he buys American products his money goes to American companies
4 Evaluate the reasonableness of the following advice: “A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance
3 Assume that initially RicardoLand does not trade with the outside world and the price of grain in RicardoLand is $5 a bushel. Further assume that RicardoLand is such a small country that it can’t
2 Refer to the table below. Assume initially that Spain makes three units of food and three desks while India makes five units of food and four desks. (a) Show how through trade both countries can
1 Refer to the table below. In which goods does France have an absolute advantage?In which goods does Syria have an absolute advantage? Rewrite the table using opportunity costs. In which goods does
25 Why does trade enable human civilization? (pages 189–190)
24 Why do most economists oppose firing Santa Claus? (page 188)
23 How can threats of retaliation promote trade? (pages 187–188)
22 How can trade promote peace? (pages 186–187)
21 Are tariffs needed to protect infant industries? (pages 185–186)
20 Does trade harm workers in rich countries? (pages 184–185)
19 Does trade harm workers in poor countries? (pages 183–184)
18 How can trade cause human brains to be used more effectively? (page 183)
17 How can trade reduce corruption? (page 182)

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