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All Textbook Solutions for Principles of Economics 2e
What is scarcity? Can you think of two causes of scarcity?Residents of the town of Smithfield like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount ham the residents can consume in a month?A consultant works for 200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?A computer systems engineer could paint his house, but it makes more sense for him to hire a painter to do it. Explain why.What would be another example of a system in the real world serve could serve as a metaphor for micro and macroeconomics?Suppose we extend the circular flow model to add imports and exports. Copy the circular flow diagram onto a sheet of paper and then add a foreign county as a third agent. Draw a rough sketch of the flows of imports, exports, and the payment for each on your diagram.What is an example of a problem in the world today, not mentioned in the chapter, that has an economic dimension?The chapter defines private enterprise as a characteristic of market-oriented economies. What would public enterprise be? Hint: It is a characteristic of command economies.Why might Belgium, France, Italy, and Sweden have a higher export to GDP ratio than the United States?Give the three reasons that explain why the division of labor increases an economys level of production.What are three reasons to study economics?What is the difference between microeconomics and macroeconomics?What are examples of individual economic agents?What are the three main goals of macroeconomics?How did John Mayhem Keynes define economics?Are households primarily buyers or sellers in the goods and services market? In the labor market?Are firms primarily buyers or sellers in the goods and services market? In the labor market?What are the three ways that societies can organize themselves economically?What is globalization? How do you think it might have affected the economy over the past decade?Suppose you have a team of two workers: one is a baker and one is a chef. Explain why file kitchen can produce more meals in a given period of time if each worker specializes in what they do best than if each worker tries to do everything from appetizer to dessert.Why would division of labor without trade not work?Can you think of any examples of free goods, that is, goods or services that are not scarce?A balanced federal budget and a balance of trade are secondary goals of macroeconomics, while growth in the standard of living (for example) is a primary goal. Why do you think that is so?Macroeconomics is an aggregate of what happens at the Microeconomics level. Would it be possible for what happens at the macro level to differ from how economic agents would react to some stimulus at the micro level? Hint: Think about the behavior of crowds.Why is it unfair or meaningless to criticize a theory as unrealistic?Suppose, as an economist, you are asked to analyze an issue unlike anything you have ever done before. Also, suppose you do not have a specific model for analyzing that issue. What should you do? Hint: What would a carpenter do in a similar situation?Why do you think that most modern countries economies are a mix of command and market types?Can you think of ways that globalization has helped you economically? Can you think of ways that it has not?Suppose Alphonsos town raised the price of bus tickets to 1 per trip (while file price of burgers stayed at 2 and his budget remained 10 per week.) Draw Alphonsos new budget constraint. What happens to file opportunity cost of bus tickets?Return to the example in Figure 2.4. Suppose there is an improvement in medical technology that enables more healthcare wilt line same amount of resources. How would this affect the production possibilities curve and, in particular, how would it affect the opportunity cost of education? Figure 2.4 Productive and Allocative EfficiencyCould a nation be producing in a way that is allocatively efficient, but productively inefficient?What are the similarities between a consumers budget constraint and societys production possibilities frontier, not just graphically but analytically?Individuals may not act in the rational, calculating way described by the economic model of decision making, measuring utility and costs at the margin, but can you make a case that they behave approximately that way?Would an op-ed piece in a newspaper urging the adoption of a particular economic policy be a positive or normative statement?Would a research study on the effects of soft drink consumption on childrens cognitive development he a positive or normative statement?Explain why scarcity leads to tradeoffs.Explain why individuals make Choices that are directly on the budget constraint, rather than inside the budget constraint DI outside it.What is comparative advantage?What does a production possibilities frontier illustrate?Why is a production possibilities frontier typically drawn as a curve, rather than a straight line?Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it.What are diminishing marginal returns?What is productive efficiency? Allocative efficiency?What is the difference between a positive and a normative statement?Is the economic model of decision-making intended as a literal description of how individuals, firms, and the governments actually make decisions?What are four responses to the claim that people should not behave in the way described in this chapter?Suppose Alphonsos town raises the price of bus tickets from 0.50 to 1 and file price of burgers rises from 2 to 4. Why is file opportunity cost of bus tickets unchanged? Suppose Alphonsns weekly spending money increases from 10 to 20. How is his budget constraint affected from all three changes? Explain.During the Second World War, Germanys factories were decimated. It also suffered many human casualties, both soldiers and civilians. How did the war affect Germanys production possibilities curve?It is clear that productive inefficiency is a waste since resources are used in a way that produces less goods and services than a nation is capable of. Why is allocative inefficiency also wasteful?What assumptions about the economy must he true for the invisible hand to work? To what extent are those assumptions valid in line real world?Do economists have any particular expertise at making normative arguments? In other words, they have expertise at making positive statements (i.e., what will happen) about some economic policy, for example, but do they have special expertise to judge whether or not the policy should be undertaken?If the price of a magazine is 4 each, what is the maximum number of magazines she could buy in a week?If the price of a pie is 12, what is the maximum number of pies she could buy in a week?Draw Maries budget constraint with pies on the horizontal axis and magazines on the vertical axis. What is the slope of me budget constraint?What is Maries opportunity cost of purchasing a pie?Review Figure 3.4. Suppose the price of gasoline is 1.60 per gallon. Is the quantity demanded higher or lower than at the equilibrium price of 1.40 per gallon? What about the quantity supplied? Is there a shortage or a surplus in the market? If so, how much? Figure 3.4 Demand and Supply of GasolineWhy do economists use the ceteris paribus assumption?In an analysis of the market for paint, an economist discovers the facts listed below. State whether each of these changes will affect supply or demand, and in what direction. There have recently been some important cost-saving inventions in the technology for making paint. Paint is lasting longer so that property owners need not repaint as often. Because of severe hailstorms, many people need to repaint now. The hailstorms damaged several factories that make paint, forcing them to close down for several months.Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram. Create a sketch of the diagram if necessary. Cars are becoming more fuel efficient, and therefore get more miles to the gallon. The winter is exceptionally cold. A major discovery of new oil is made off the coast of Norway. The economies of some major oil-using nations, like Japan, slow down. A war in the Middle East disrupts oil-pumping schedules. Landlords install additional insulation in buildings. The price of solar energy falls dramatically. Chemical companies invent a new, popular kind of plastic made from oil.Lets think about the market for air travel. From August 2014 to January 2015, the price of jet fuel increased roughly 47. Using the four-step analysis, how do you think this fuel price increase affected the equilibrium price and quantity of air navel?A tariff is a tax on imported goods. Suppose the U.S. government cuts the tariff on imported flat screen televisions. Using the four-step analysis, how do you think the tariff reduction will affect the equilibrium price and quantity of flat screen TVS?What is the effect of a price ceiling on the quantity demanded of the product? What is the effect of a price ceiling on the quantity supplied? Why exactly does a price ceiling cause a shortage?Does a price ceiling change the equilibrium price?What would be the impact of imposing a price flour below the equilibrium price?Does a price ceiling increase the decrease the number of transactions in a market? Why? What about a price floor?If a price floor benefits producers, why does a price floor reduce social surplus?What determines the level of prices in a market?What does a downward-sloping demand curve mean about how buyers in a market will react to a higher price?Will demand curves have the same exact shape in all markets? If not, how will they differ?Will supply curves have the same shape in all markets? If not, how will they differ?What is the relationship between quantity Demanded and quantity supplied at equilibrium? What is the relationship when there is a shortage? What is the relationship when them is a surplus?How can you locate the equilibrium point on a demand and supply graph?If the price is above line equilibrium level, would you predict a surplus or a shortage? If line price is below the equilibrium level, would you predict a surplus or a shortage? Why?When the price is above the equilibrium, explain how market forces move me market price to equilibrium. Do the same when the price is below the equilibrium.What is the difference between the demand and the quantity demanded of a product, say milk? Explain in words and show the difference on a graph with a demand curve for milk.What is the difference between the supply and the quantity supplied of a product, say milk? Explain in words and show the difference on a graph with the supply curve for milk.When analyzing a market, how do economists deal with the problem that many factors that affect the market are changing at the same time?Name some factors that can cause a shift in line demand curve in markets for goods and services.Name some farm that can cause a shift in the supply curve in markets for goods and services.How does one analyze a market where both demand and supply shift?What causes a movement along the demand curve? What causes a movement along the supply curve?Does a price ceiling attempt to make a price higher or lower?How does a price ceiling set below the equilibrium level affect quantity demanded and quantity supplied?Does a price floor attempt to make a price higher or lower?How does a price floor 521 above the equilibrium level affect quantity demanded and quantity1 supplied?What is consumer surplus? How is it illustrated on a demand and supply diagram?What is producer surplus? How is it illustrated on a demand and supply diagram?What is total surplus? How is it illustrated on a demand and supply diagram?What is the relationship between total surplus and economic efficiency?What is deadweight loss?Review Figure 3.4. Suppose the government decided that, since gasoline is a necessity, its price should be legally capped at 1.30 per gallon. What do you anticipate would be the outcome in the gasoline market? Figure 3.4 Demand and Supply of GasolineExplain why the following statement is false: In the goods market, no buyer would be willing to pay more than me equilibrium price.Explain why the following statement is false: In the goods market, no seller would be willing to sell for less than the equilibrium price.Consider the demand for hamburgers. If the price of a substitute good (for example, hot dogs) increases and the price of a complement good (for example, hamburger buns) increases, can you tell for sure what will happen to the demand for hamburger? Why or why not? Illustrate your answer with a graph.How do you suppose the demographics of an aging population of Baby Boomers' in the United States will affect the demand for milk? Justify your answer.We know that a change in the price of a product causes a movement along the demand curve. Suppose consumers believe that prices will be rising in the future. How will that affect demand for the product in the present? Can you show this graphically?Suppose there is a soda tax to curb obesity. What should a reduction in the soda tax do to the supply of sodas and to the equilibrium price and quantity? Canyon show this graphically? Hint: Assume that the soda tax is collected from the sellers.Use the four-step process to analyze the impact of the advent of the iPod (or other portable digital music players) on the equilibrium price and quantity of the Sony Wellman (or other portable audio cassette player).Use the four-step process to analyze the impact of a Deduction in tariffs on imports of iPods on the equilibrium price and quantity of Sony Walkman-type products.Suppose both of these events took place at the same time. Combine your analyses of the impacts of the iPod and the tariff Induction to determine the likely impact on the equilibrium price and quantity of Sony Walkman-type products. Shaw your answer graphically.Must government policy decisions have winners and losers? What are the effects of raising the minimum wage? It is more complex than simply producers lose and workers gain. Who are the winners and who are the lasers, and what exactly do they win and lose? To what extent does the policy change achieve its goals?Agricultural price supports result in governments holding large inventories of agricultural products. Why do you think the government cannot simply give the products away to poor people?Can you propose a policy that meld induce the market to supply more rental housing units?What term would an economist use to describe what happens when a shopper gets in good deal on a product?Explain why voluntary Martians improve social welfare.Why would a free market mar operate at a quantity greater than the equilibrium quantity? Hint: What would be required for at transaction to occur at that quantity?Review Figure 3.4 again. Suppose the price of gasoline is 1.00. Will the quantity demanded he lower or higher than at the equilibrium price of 1.40 per gallon? Will the quantity supplied be lower or higher? Is them a shortage or a surplus in the market? If so, of how much? Figure 3.4 Demand and Supply of GasolineTable 3.8 shows information on the demand and supply for bicycles, where the quantities of bicycles are measured in thousands. What is the quantity demanded and the quantity supplied at a price of 210? At what price is the quantity supplied equal to 48,000? Graph the demand and supply curve for bicycles. How can you determine the equilibrium price and quantity from the graph? How can you determine the equilibrium price and quantity from line table? What HIE die equilibrium price and equilibrium quantity? If the price was 120, what would the quantities demanded and supplied he? Would a shortage or surplus exist? If so, how large would the shortage or surplus he?The computer market in recent years has seen many more computing sell at much lower prices. What shift in demand or supply is most likely to explain this outcome? Sketch a demand and supply diagram and explain your reasoning for each. A rise in demand A fall in demand A rise in supply A fall in supplyTable 3.9 illustrates the markets demand and supply for cheddar cheese. Graph the data and find the equilibrium. Next, create a table showing the change in quantity demanded or quantity supplied, and a graph of the new equilibrium, in each of the following situations: The price of milk, a key input for cheese production, rises, so that the supply decreases by 80 pounds at every price. A new study says that eating cheese is good for your health, so that demand increases by 20 at every price.Table 3.10 shows the supply and demand for movie tickets in a city. Graph demand and supply and identify the equilibrium. Then calculate in a table and graph the effect of the following changes. Three new nightclubs open. They offer decent bands and have no cover charge, but make their money by selling food and drink. As a result, demand for movie tickets falls by six units at every price. The city eliminates a tax that it placed on all local entertainment businesses. The result is that the quantity supplied of movies at any given price increases by 10%.A low-income county decides to set a price ceiling on bread so it can make sure that bread is affordable to the poor. Table 3.11 provides the conditions of demand and supply. What are the equilibrium price and equilibrium quantity before the price ceiling? What will the excess demand or the shortage (that is, quantity demanded minus quantity supplied) be if the price ceiling is set at 2.40? At 2.00? At 3.50?In the labor market, what causes a movement along the demand curve? What causes a shift in the demand curve?In the labor market, what causes a movement along the supply curve? What causes a shift in the supply curve?Why is a living wage considered a price floor? Does imposing a living wage have the same outcome as a minimum wage?In the financial market, what causes a movement along the demand curve? What causes a shift in the demand curve?In the financial market, what causes a movement along the supply curve? What causes a shift in the supply curve?If a usury law limits interest rates to no more than 35, what would the likely impact be on the amount of loans made and interest rates paid?Which of the following changes in the financial market will lead to a decline in interest rates: a rise in demand a fall in demand a rise in supply a fall in supplyWhich of the following changes in the financial market will lead In an increase in the quantity of loans made and received: a rise in demand a fall in demand a rise in supply a fall in supplyIdentify the most accurate statement. A price floor will have live largest effect if it is set: substantially above the equilibrium price slightly above the equilibrium price slightly below the equilibrium price substantially below the equilibrium priceA price ceiling will have the largest effect: substantially below the equilibrium price slightly below the equilibrium price substantially above the equilibrium price slightly above the equilibrium price Sketch all four of these possibilities on a demand and supply diagram to illustrate your answer.Select the correct answer. A price floor will usually shift: demand supply both neither Illustrate your answer with a diagram.Select the correct answer. A price ceiling will usually shift: demand supply both neitherWhat is die price commonly called in the labor market?Are households demanders or suppliers in the goods market? Are firms demanders or suppliers in the goods market? What about the labor market and the financial market?Name some factors that can cause a shift in the demand curve in labor markets.Name some factors that can cause- a shift in the supply curve in labor markets.How do economists define equilibrium in financial markets?What would be a sign of a shortage in financial markets?Would usury laws help or hinder resolution of a shortage in financial markets?Whether the product market or the labor market, what happens to line equilibrium price and quantity for each of the four possibilities: increase in demand, decrease in demand, increase in supply; and decrease in supply.Other than the demand for labor, what would be another example of a 'derived demand?Suppose that a 5 increase in the minimum wag causes a 5 reduction in employment. How would this affect employment and how would it affect workers? In your opinion, would this be a good policy?Under what Circumstances would a minimum wage be a nonbinding price floor? Under what circumstances would a living wage be a binding price floor?Suppose the U.S. economy began to grow more rapidly than other counties in the world. What would be the likely impact on U.S. financial markets as part of the global economy?If the government imposed a federal interest rate ceiling of 20 on all loans, who would gain and who would lose?Why are the factors that shift the demand for a product different from the factors that shift the demand for labor? Why are the factors that shift the supply of a product different from those that shift the supply of labor?During a discussion several year; ago on building a pipeline to Alaska to carry natural gas, the U.S. Senate passed a bill stipulating mat there should be a guaranteed minimum price for the natural gas that would flow through line pipeline. The thinking behind the bill was that if private firms had a guaranteed price for their natural gas, they would be more willing to drill for gas and to pay to build the pipeline. Using the demand and supply framework, predict the effects of this price floor on fine price, quantity demanded, and quantity supplied. With the enactment of this price floor for natural gas, what are some of the likely unintended consequences in line market? Suggest some policies other than the price floor that he government can pursue if it wishes to encourage drilling for natural gas and fur a new pipeline in Alaska.Identify each of the following as involving either demand or supply. Draw a circular flow diagram and label the flows A through F. (Some choices can be on both sides of the goods market.) Households in the labor market Firms in the goods market Firms in the financial market Households in the goods market Firms in the labor market Households in the financial marketPredict how each of the following events will raise or lower the equilibrium wage and quantity of oil worker in Texas. In each case, sketch a demand and supply diagram to illustrate your answer. The price of oil rises. New all-drilling equipment is invented that is cheap and requires few workers to run. Several major companies that do not drill oil open factories in Texas, offering many well-paid jobs outside the oil industry. Government imposes costly new regulations to make oil-drilling a safer job.Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers. The number of people at the most common ages for home-buying increases. People gain confidence that the economy is growing and that their jobs are secure. Banks that have made home loans find that a larger number of people than they expected are not repaying these loans. Because of a threat of a war, people become uncertain about their economic future. The overall level of saving, in the economy diminishes. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.Table 4.6 shows the amount of savings and barrowing in a market for loans lo purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? How can you tell? Now, imagine that because of a shift in the perceptions of foreign investors, the supply curve shifts so that there will be 10 million less supplied at every interest rate. Calculate the new equilibrium interest rate and quantity, and explain why the direction of the interest tale shift makes intuitive sense.Imagine that to preserve the traditional way of life in small fishing villages, at government decides to impose a price floor that will guarantee all fishermen a certain price for their catch. Using the demand and supply framework, predict the effects on the price, quantity demanded, and quantity supplied. With the enactment of this price floor for fish, what are some of the likely unintended consequences in file market? Suggest some policies other than the price floor to make it possible for small fishing villages to continue.What happens to the price and the quantity bought and sold in the cocoa market if counties producing cocoa experience a drought and a new study is released demonstrating the health benefits of cocoa? Illustrate your answer with a demand and supply graph.From the data in Table 5.5 about demand for smart phones, calculate the price elasticity of demand from: point B to point C, point D to point E, and point G to point H. Classify the elasticity at each point as elastic, inelastic, or unit elastic.From the data in Table 5.6 about supply of alarm clocks, calculate the price elasticity of supply from: point J to point K, point L to point M, and point N to point P. Classify the elasticity at each point as elastic, inelastic, or unit elastic.Why is the demand curve with constant unitary elasticity concave?Why is the supply curve with constant unitary elasticity a straight line?The federal 3mm decides to require that automobile manufacturers install new anti-pollution equipment that costs 2,000 per car. Under what conditions can carmakers pass almost all of this cost along to car buyers? Under what conditions can carmakers pass very little of this cost along to car buyers?Suppose you are in change of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your companys product at the current price is 1.4, would you advise the company to raise the price, lower the price, or to keep the price the same? What if the elasticity were 0.6? What if it were 1? Explain your answer.What would the gasoline price elasticity of supply mean to UPS or FedEx?The avenge annual income rises from 25,000 to 33,000, and the quantity of bleed consumed in a year by the avenge person falls from 30 loaves to 22 loaves. What is the income elasticity of bread consumption? Is bread a normal or an inferior good?Suppose the cross-price elasticity of apples with respect to the price of oranges is 0.4, and the price of oranges falls by 3. What will happen to the demand for apples?What is the formula for calculating elasticity?What is the price elasticity of demand? Can you explain it in your own words?What is the price elasticity of supply? Can you explain it in your own words?Describe the general appearance of a demand or a supply tune with zero elasticity.Describe the general appearance of a demand or a supply curve with infinite elasticity.If demand is elastic, will shifts in supply have a larger effect on equilibrium quantity or on price?If demand is inelastic, will shifts in supply have a larger effect on equilibrium price or on quantity?If supply is elastic, will shifts in demand have a larger effect on equilibrium quantity or on price?If supply is inelastic, will shifts in demand have a larger effect on equilibrium price or on quantity?Would you usually expect elasticity of demand or supply to be higher in the short run or in the long run? Why?Under which circumstances does line tax burden fall entirely on consumers?What is the formula for the income elasticity of demand?What is the formula for line cross-price elasticity of demand?What is the formula for the wage elasticity of labor supply?What is the formula for elasticity of savings with respect to interest rates?Transatlantic air travel in business class has an estimated elasticity of demand of 0.62, while transatlantic air travel in economy class has an estimated price elasticity of 0.12. Why do you think this is the case?What is the relationship between price elasticity and position on the demand curve? For example, as you move up the demand curve to higher prices and lower quantities, what happens lo the measured elasticity? How would you explain that?Can you think of an industry (or product) with near infinite elasticity of supply in the short term? That is, what is an industry that could increase Qs almost without limit in response to an increase in the price?Would you expect supply to play a more significant role in determining the price of a basic necessity like food or a luxury like perfume? Explain. Hint: Think about how the price elasticity of demand will differ between necessities and luxuries.A city has build a bridge over a river and it decides to charge a toll to everyone who crosses. For one year, the city charges a variety of different tolls and records information on how many drivers cross the bridge. The city thus gathers information about elasticity of demand. If the city wishes to raise as much revenue as possible from the tolls, where will the city decide to charge a toll: in the inelastic portion of the demand curve, the elastic portion of the demand curve, or the unit elastic portion? Explain.In a market where the supply curve is perfectly inelastic how does an excise tax affect the price paid by consumers and the quantity bought and sold?Economists define normal goods as having a positive income elasticity. We can divide normal goods into two types: Those whose income elasticity is less than one and those whose income elasticity is greater than one. Think about products that would fall into each category. Can you come up with a name for each category?Suppose you could buy shoes one at a time, miter than in pain. What do you predict the cross-price elasticity for left shoes and right shoes would be?The equation for a demand curve is P=483Q. What is the elasticity in moving from quantity of 5 to a quantity of 6?The equation for a demand curve is P=2/Q. What is the elasticity of demand as price falls from 5 to 4? What is the elasticity of demand as the price falls from 9 to 8? Would you expect these answers to be the same?The equation for a supply curve is 4P=Q. What is the elasticity of supply as price rises from 3 to 4? What is the elasticity of supply as the price rises from 7 to 8? Would you expect these answers to be the same?The equation for a supply curve is P=3Q8. What is the elasticity in moving from a price of 4 to a price of 7?The supply of paintings by Leonardo Da Vinci, who painted the Mona Lisa and The Last Supper and died in 1519, is highly inelastic. Sketch a supply and demand diagram, paying attention to the appropriate elasticities, to illustrate that demand for these paintings will determine the price.Say that a certain stadium for professional football has 70,000 seals. What is the shape of the supply curve for tickets to football games at that stadium? Explain.When someones kidneys fail, the person needs to have medical treatment with a dialysis machine (unless or until they receive a kidney transplant) or they will die. Sketch a supply and demand diagram, paying attention to the appropriate elasticities, to illustrate that the supply of such dialysis machines will primarily determine the pure.Assume that the supply of law-skilled worker is fairly elastic, but the employers demand for such workers is fairly inelastic. If the policy goal is to expand employment for low-skilled workers, is it better to focus on policy tools to shift the supply of unskilled labor or on tools to shift the demand for unskilled labor? What if the policy goal is to raise wages for this group? Explain your answer with supply and demand diagrams.Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a round—trip cost of 2 in gasoline money. He has a total of 10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilimometer that measures his total utility from personal visits and from phone minutes. Using the values in Table 6.6, figure out the points 011 Jeremys consumption choice budget constraint (it may be helpful to do a sketch) and identify his utility-maximizing point.Take Jeremys total utility information in Exercise 6.1, and use the marginal utility approach to confirm the choice of phone minutes and round trips that maximize Jeremys utility.Explain all the reasons why a decrease in a products price would lead to an increase in purchases.As a college student you work at a part-time job, but your parents also send you a monthly allowance. Suppose one month your parents forgot to send the check. Show graphically how your budget constraint is affected. Assuming you only buy normal goods, what would happen to your purchases of goods?Who determines how much utility an individual will receive from consuming a good?Would you expect total utility to rise or fall with additional consumption of a good? Why?Would you expect marginal utility to rise or fall with additional consumption of a good? Why?Is it possible for total utility to increase while marginal utility diminishes? Explain.If people do not have a complete mental picture of total utility for every level of consumption, how can they find their utility-maximizing consumption choice?What is the rule relating the ratio of marginal utility to prices of two goods at the optimal choice? Explain why, if this rule does not hold, the choice cannot be utility-maximizingAs a general rule, is it safe to assume that a change in the price of a good will always have its most significant impact on the quantity demanded of that good, rather than on the quantity demanded of miller goods? Explain.Why does a change in income cause a parallel shift in the budget constraint?Think back to a purchase that you made recently. How would you describe your thinking before you made that purchase?The rules of politics are not always the same as the rules of economics. In discussions of setting budgets for government agencies, there is a strategy called closing the Washington Monument. When an agency faces the unwelcome prospect of a budget cut, it may decide to close a high-visibility attraction enjoyed by many people (like the Washington Monument). Explain in terms of diminishing marginal utility why the Washington Monument strategy is So misleading. Hint: If you are really trying to make the best of a budget cut, should you cut the items in your budget with tile highest marginal utility or line lowest marginal utility? Does the Washington Monument strategy cut the items with the highest marginal utility or line lowest marginal utility?Income Effects depend on the income elasticity of demand for each good limit you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true of the income elasticity of the other good you buy?Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first poem 27 units of marginal utility from her second poem 24 units of marginal utility from her third poem, and so on, with marginal utility declining by three units for each additional poem. Praxilla gets six units of marginal utility for each of her next three cucumbers consumed, five units of marginal utility for each of her next three cucumbers consumed, four units of marginal utility for each of the following three cucumbers consumed, and so on, with marginal utility declining by one for every three cucumber consumed. A poem costs three bronze coins hut a cucumber costs only one bronze coin. Praxilla has 18 bronze coins. Sketch Praxillas budget set between poems and cucumbers, placing poems on the vertical axis and cucumbers on the horizontal axis. Start off with the choice of zero poems and 18 cucumbers, and calculate the changes in marginal utility of moving along the budget line to the next choice of one poem and 15 cucumbers. Using this step-by-step process based on marginal utility, create a table and identify Praxillas utility—maximizing choice. Compare the marginal utility of the two goods and the relative prices at the optimal choice to see if the expected relationship holds. Hint: Label the table columns: 1) Choice, 2} Marginal Gain from More Poems, 3) Marginal Loss from Fewer Cucumbers, 4) Overall Gain or Loss, 5) Is the previous choice Optimal? Label the table rows: 1) 0 Poems and 18 Cucumbers, 2) 1 Poem and 15 cucumbers, 3) 2 Poems and 12 cucumbers, 4) 3 Poems and 9 Cucumbers, 5) 4 Poems and 6 cucumbers 6) 5 Poems and 3 Cucumbers, 7) 6 Poems and 0 Cucumbers.If a 10 decrease in the price of one product that you buy causes an 8 increase in quantity demanded of that product, will another 10 decrease in the price cause another 3 increase (no more and no less) in quantity demanded?A firm had sales revenue of 1 million last year. It spent 600,000 on labor, 150,000 on capital and 200,000 on materials. What was the firms accounting profit?Continuing from Exercise 7.1, the films factory sits on land owned by the firm that it could rent for 30,000 per year. What was the films economic profit last year?The WipeOut Ski Company manufactures skis for beginners. Fixed costs are 30. Fill in Table 7.16 for total cost, average variable test, average total cost, and marginal cost.Based on your answers to the WipeOut Ski Company in Exercise 7.3, now imagine a situation where the firm produces a quantity of 5 units that it sells for a price of 25 each. What will be the companys profits or losses? How can you tell at a glance whether the company is making or losing money at this price by looking at average cost? At the given quantity and price, is the marginal unit produced adding to profits?If two painters can paint 200 square feet of wall in an hour, and three painters can paint 275 square feet, what is the marginal product of the third painter?Return to the problem explained in Table 7.13 and Table 7.14. 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 production? Which method should the firm use, and why?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 film choose now?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 the quantity produced at the bottom of the long-run average cost curve. What do you expect will happen to the domestic auto industry in the long run?What are explicit and implicit costs?Would you consider an interest payment on a loan to a film an explicit or implicit cost?What is die difference between accounting and economic profit?What is a production function?What is the difference between a fixed input and a variable input?How do we calculate marginal product?What shapes would you generally expect a total product curve and a marginal product curve to have?What are the factor payments for land, labor, and capital?What is the difference between fixed costs and variable costs?How do we calculate each of the following: marginal cost, average total cost, and average variable cost?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?Are there fixed costs in the lung-run? Explain briefly.Are fixed costs also sunk costs? Explain.What are diminishing marginal returns as they relate to costs?Which costs are measured on per-unit basis: fixed costs, average cost, avenge variable cost, variable costs, and marginal cost?What is a production technology?In choosing a production technology, how will firms react if one input becomes relatively more expensive?What is a long-run average cost curve?What is the difference between economies of scale, constant returns to scale, and diseconomies of scale?What shape of a long-run average cost curve illustrates economies of scale, constant returns to scale, and diseconomies of scale?Why will firms in most markets be located at or close to the bottom of the long-run avenge cost me?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?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 cost curve look like? Use your response to explain what spreading the overhead means.How does fixed cost affect marginal cost? Why is this relationship important?Average cost curves (except for avenge 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 marginal cost curve is increasing. Why do you think that average and marginal cost curves have the same general shape?What is the relationship between marginal product and marginal cost? (Hint: Look at the curves.) Why do you suppose that is? Is this relationship the same in the long run as in the short run?It is clear that businesses operate in the short run, but do they ever operate in the long run? Discuss.Retune to Table 7.2. In the top half of the table, at what point does diminishing marginal productivity kick in? What about in the bottom half of the table? How do you explain this?How would an improvement in technology, like the high-efficiency gas turbines or Pirelli tire plant, affect me lung-nm average cost curve of a firm? Can you draw the old curve and the new one on the same axes? How might such an improvement affect other firms in the industry?Do you think that the taxicab industry in large cities would be subject to significant economies of scale? Why or why not?A firm is considering an investment that will earn a 6 rate of return. If it were to borrow the money, it would have of pay 8 interest on the loan, but it currently has the cash, so it will But need to borrow. Should the firm make line investment? Show your work.Return to Figure 7.7. What is the marginal gain in output from increasing the number of batters from 4 to 5 and from 5 to 6? Does it continue the pattern of diminishing marginal returns? Figure 7.7 How output Affects Total costsCompute the average total cost, average variable cost, and marginal cost of producing 50 and 72 haircuts. Draw the graph of line three curves between 60 and 72 haircuts.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: intensive labor with hand shovels, less labor with snow blowers, and still less labor with a pickup truck that has a snowplow on front. To summarize, the method Choices are: Method 1: 50 units of labor, 10 units of capital Method 2: 20 units of labor, 40 units of capital Method 3: 10 units of labor, 70 units of capital If hiring labor for the winter costs $100/unit and a unit of capital costs 400, what is the best production method? What method should the company use if the cost of labor rises to $20/unit?Firms ill 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 product in a perfectly competitive market, but you are not happy with its price, would you raise the price, even by a cent?Would independent trucking fit the characteristics of a perfectly competitive industry?Look at Table 8.13. What would happen to the films profits if the market price increases to 6 per pack of raspberries?Suppose that the market price increases to 6, as Table 8.14 shows. What would happen to the profit-maximizing output level?Explain in words why a profit-maximizing film will not choose to produce at a quantity where marginal cost exceeds marginal revenue.A firms marginal cost curve above the average variable cost curve is equal to the films individual supply curve. This means that every time a firm receives a price from the market it will be willing to supply the amount of output where the price equals marginal cost. What happens to the films individual supply curve if marginal costs increase?If new technology in a perfectly competitive market brings about a substantial reduction in costs of production, how will this affect the market?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?Productive efficiency and allocative efficiency are two concepts achieved in the long mm in a perfectly competitive market. These are the two reasons why we call them perfect. How would you use these two concepts to analyze other market structures and label them imperfect?Explain how the profit-maximizing rule of setting P=MC leads a perfectly competitive market to be allocatively efficient.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?What are the four basic assumptions of perfect competition? Explain in words what they imply for a perfectly competitive firm.What is a price taker firm?How does a perfectly competitive firm decide what price to charge?What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?How does a perfectly competitive film calculate total revenue?Briefly explain the reason for the shape of a marginal revenue curve for a perfectly competitive firm.What two rules does a perfectly competitive firm apply to determine its profit-maximizing quantity of output?How does the average cost curve help to show whether a firm is making profits or losses?What two lines on a cost curve diagram intersect at the zero-profit point?Should a firm shut down immediately if it is making losses?How does the average variable cost curve help a firm know whether it should shut down immediately?What two lines on a cost curve diagram intersect at the shutdown point?Why does entry occur?Why does exit occur?Do entry and exit occur in the short run, the long run, both, or neither?What price will a perfectly competitive firm end up charging up the long run? Why?Will a perfectly competitive market display productive efficiency? Why or why not?Will a perfectly competitive market display allocative efficiency? Why or why not?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. Think about how this market works and some of its characteristics, such as search costs. Would you consider it a perfectly competitive market?Can you name five examples of perfectly competitive markets? Why or why not?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 for your product?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?Many films in the United States file for bankruptcy every year, yet they still continue operating. Why would they do this instead of completely shutting down?Why will profits for films in a perfectly competitive industry tend to vanish in the long run?Why will losses for firms in a perfectly competitive industry tend to vanish in the long run?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?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 film represents the costs to society. Can you think of some social costs or issues that are not included in the marginal cost to the firm? Or some social gains that are not included in what people pay for a good?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 units, and 80 for five units. In the form of a table, calculate total revenue, marginal revenue, total cost, and marginal cost for each output level (one to five units). What is the Profit-maximizing quantity of output? On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves.Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for 72 each. The fixed costs of production are 109. The total variable costs are 54 for one unit, 84 for two units, 114 for three units, 134 for four units, and 270 for five units. 111 the fauna of a table, calculate total revenue, marginal revenue, total cost and marginal cost for each output level (one to five units). On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves. What is the profit maximizing quantity?A computer company produces affordable, easy-to-use 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, 300 for the third, 350 for the fourth, 430 for the fifth, 450 for the sixth, and 500 for the seventh. Create a table that shows the companys output, total cost, marginal cost, average cost, variable cost, and average variable cost. At what price is the zero-profit point? At what price is the shutdown point? If the company sells the computers for 500, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVG curves to illustrate your answer and show the profit or loss. If the firm sells the computers for 300, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVG curves to illustrate your answer and show the profit or loss.Classify the following as a government-enforced barrier to entry, a banker to entry that is not government-enforced, or a situation that does not involve a barrier to entry. A patented invention A popular but easily copied restaurant recipe An industry where economies of scale are very small compared to the size of demand in the market A well-established reputation for slashing prices in response to new entry A well-respected brand name that has been carefully built up over many yearsClassify the following as a government-enforced barrier to entry, a banker to entry that is not government enforced, or a situation that does not involve a barrier to entry. A City passes a law on how many licenses it will issue for taxicabs A city passes a law that all taxicab drivers must pass a driving safety test and have insurance A well-known trademark Owning a spring that offers very pure water An industry where economies of scale are very large compared to the size of demand in the marketSuppose the local electrical utility, a legal monopoly based on economies of scale, was split into four films of equal size, with the idea that eliminating the monopoly would promote competitive pricing of electricity. What do you anticipate would happen to prices?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?Suppose demand for a monopolys product falls 50 that its profit-maximizing price is below average variable cost. How much output should the film supply? Hint: Draw the graph.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?How is monopoly different from perfect competition?What is a barrier to entry? Give some examples.What is a natural monopoly?What is a legal monopoly?What is predatory pricing?How is intellectual property different from other property?What legal mechanisms protect intellectual property?In what sense is a natural monopoly natural?How is the demand curve perceived by a perfectly competitive firm different from the demand curve perceived by a monopolist?