Briefly explain whether you agree with the following argument: Adam Smith’s idea of the gains to firms from the division of labor makes a lot of sense when the good being manufactured is something complex like automobiles or computers, but it doesn’t apply in the manufacturing of less complex goods or in other sectors of the economy, such as retail sales.
> Explain why it is true that for a firm in a perfectly competitive market, P = MR = AR.
> In 2015, some beer drinkers f iled a lawsuit against Anheuser-Busch, the brewer of Beck’s beer. The beer drinkers claimed that Beck’s was marketed as an authentic German beer but was actually brewed in St. Louis. Other breweries have established faciliti
> The financial writer Andrew Tobias described an incident that occurred when he was a student at the Harvard Business School: Each student in the class was given large amounts of information about a particular firm and asked to determine a pricing strateg
> If a 10 percent increase in the price of Cheerios causes a 25 percent reduction in the number of boxes of Cheerios demanded, what is the price elasticity of demand for Cheerios? Is the demand for Cheerios elastic or inelastic?
> Explain whether you agree with the following remark: According to the model of perfectly competitive markets, the demand curve for wheat should be a horizontal line. But this can’t be true: When the price of wheat rises, the quantity of wheat demanded fa
> Suppose that Jill Johnson has to choose between building a smaller restaurant and a larger restaurant. In the graph on the next page, the relationship between costs and output for the smaller restaurant is represented by the curve ATC1, and the relations
> Suppose an economist develops an economic model and finds that “it works great in theory, but it fails in practice.” What should the economist do next?
> The late Nobel Prize–winning economist George Stigler once wrote, “the most common and most important criticism of perfect competition … [is] that it is unrealistic.” Since few firms sell identical products in markets where there are no barriers to entry
> Explain whether each of the following is a perfectly competitive market. For each market that is not perfectly competitive, explain why it is not. a. Corn farming b. Coffee shops c. Automobile manufacturing d. New home construction
> Draw a graph showing the market demand and supply curves for corn and the demand curve for the corn produced by one corn farmer. Be sure to indicate the market price and the price the corn farmer receives.
> What is a price taker? When are firms likely to be price takers?
> What are the three conditions for a market to be perfectly competitive?
> What are diseconomies of scale? What is the main reason that a firm eventually encounters diseconomies of scale as it keeps increasing the size of its store or factory?
> What are economies of scale? What are four reasons that firms may experience economies of scale?
> When will the private cost of producing a good differ from the social cost? Give an example. When will the private benefit from consuming a good differ from the social benefit? Give an example.
> What is minimum efficient scale? What is likely to happen in the long run to firms that do not reach minimum efficient scale?
> What is the difference between total cost and variable cost in the long run?
> Explain how the events listed in (a) through (d) would affect the following costs at Southwest Airlines: 1. Marginal cost 2. Average variable cost 3. Average fixed cost 4. Average total cost a. Southwest signs a new contract with the Transport Workers Un
> Which of the following products are most likely to have significant network externalities? Briefly explain. a. Smart watches b. Dog food c. Board games d. LCD televisions e. 3D televisions
> An article in the Wall Street Journal described the Chinese automobile industry as “a hodgepodge of companies,” most of which produce fewer than 100,000 cars per year. Ford Chief Executive Alan Mulally commented on the situation by saying, “If you don’t
> List the errors in the following graph. Carefully explain why the curves drawn this way are incorrect. In other words, why can’t these curves be as they are shown in the graph? Costs AFC AVC ATC Quantity of output
> Use the information in the graph to find the values for the following at an output level of 1,000. a. Marginal cost b. Total cost c. Variable cost d. Fixed cost Costs MC ATC AVC $30 15 1,000 Quantity of output 20
> We saw in the chapter opener that some colleges and private companies have launched online courses that anyone with an Internet connection can take. The most successful of these massive open online courses (MOOCs) have attracted tens of thousands of stud
> In the ancient world, a book could be produced either on a scroll or as a codex, which was made of folded sheets glued together, something like a modern book. One scholar has estimated the following variable costs (in Greek drachmas) of the two methods:
> One description of the costs of operating a railroad makes the following observation: “The fixed … expenses which attach to the operation of railroads … are in the nature of a tax upon the business of the road; the smaller the [amount of] business, the l
> What is marginal cost? Why is the supply curve referred to as a marginal cost curve?
> Suppose the total cost of producing 10,000 tennis balls is $30,000 and the fixed cost is $10,000. a. What is the variable cost? b. When output is 10,000, what are the average variable cost and the average fixed cost? c. Assume that the cost curves have t
> As the level of output increases, what happens to the difference between the value of average total cost and the value of average variable cost?
> Where does the marginal cost curve intersect the average variable cost curve and the average total cost curve?
> Using symbols, we can write that the marginal product of labor is equal to Q> L. Marginal cost is equal to TC> Q. Because fixed costs by definition don’t change, marginal cost is also equal to VC> Q. If Jill Johnson’s only variable cost (VC) is l
> An article in the Wall Street Journal gave the following explanation of how products were traditionally priced at Parker-Hannifin Corporation: For as long as anyone at the 89-year-old company could recall, Parker used the same simple formula to determine
> Is Jill Johnson correct when she states the following: “I am currently producing 20,000 pizzas per month at a total cost of $75,000? If I produce 20,001 pizzas, my total cost will rise to $75,002. Therefore, my marginal cost of producing pizzas must be i
> Why can short-run average cost never be less than long run average cost for a given level of output?
> Is Jill Johnson correct when she states the following: “I am currently producing 10,000 pizzas per month at a total cost of $50,000.00? If I produce 10,001 pizzas, my total cost will rise to $50,011.00. Therefore, my marginal cost of producing pizzas mus
> Santiago Delgado owns a copier store. He leases two copy machines for which he pays $20 each per day. He cannot increase the number of machines he leases without giving the office machine company six weeks’ notice. He can hire as many w
> Suppose a firm has no fixed costs, so all its costs are variable, even in the short run. a. If the firm’s marginal costs are continually increasing (that is, marginal cost is increasing from the first unit of output produced), will the firm’s average tot
> What do economists mean when they use the Latin expression ceteris paribus?
> Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.
> Older oil wells that produce fewer than 10 barrels of oil a day are called “stripper” wells. Suppose that you and a partner own a stripper well that can produce 8 barrels of oil per day, and you estimate that the marginal cost of producing another barrel
> Explain why the marginal cost curve intersects the average total cost curve at the level of output where average total cost is at a minimum.
> Explain why the marginal cost curve intersects the average total cost curve at the level of output where average total cost is at a minimum.
> If the marginal product of labor is rising, is the marginal cost of production rising or falling? Briefly explain.
> Does everyone gain from international trade? If not, explain which groups lose.
> If the marginal product of labor is rising, is the marginal cost of production rising or falling? Briefly explain.
> The following table shows the quantity of workers and total output for a local pizza parlor. Answer the following questions based on this table: a. When the owner hires 4 workers, what is average product of labor? b. What is the marginal product of the
> Small business owner Jay Goltz described several decisions he made to reduce the fixed costs of his businesses, including replacing halogen lamps with LED lamps. Goltz noted, “I’m guessing that many business owners could save a lot more than pennies on t
> Is it possible for a firm to experience a technological change that would increase the marginal product of labor while leaving the average product of labor unchanged? Explain.
> What is a production possibilities frontier? How can we show efficiency on a production possibilities frontier? How can we show inefficiency? What causes a production possibilities frontier to shift outward?
> Sally looks at her college transcript and asks you, “How is this possible? My grade point average for this semester’s courses is higher than my grade point average for last semester’s courses, but my cumulative grade point average still went down from la
> A student looks at the numbers in Table 11.3 on page 371 and draws this conclusion: The marginal product of labor is increasing for the first two workers hired, and then it declines for the next four workers. I guess each of the first two workers must ha
> Use the numbers from problem 3.4 to draw one graph that shows how total output increases with the quantity of workers hired and a second graph that shows the marginal product of labor and the average product of labor. Problem 3.4: Marginal Product of
> Fill in the missing values in the following table. Marginal Product of Product of Labor Average Quantity of Workers Total Output Labor 1 400 900 3 1,500 4 1,900 2,200 2,400 7. 2,300 2. 6.
> What is the law of diminishing returns? Does it apply in the long run?
> Would a business be expected to survive in the long run if it earned a positive accounting profit but a negative economic profit? Briefly explain.
> When the DuPont chemical company first attempted to enter the paint business, it was not successful. According to a company report, in one year it “lost nearly $500,000 in actual cash in addition to an expected return on investment of nearly $500,000, wh
> How do specialization and division of labor typically affect the marginal product of labor?
> Draw a graph that shows the usual relationship between the marginal product of labor and the average product of labor. Why do the marginal product of labor and the average product of labor curves have the shapes you drew?
> Briefly discuss each of the following economic ideas: People are rational, people respond to economic incentives, and optimal decisions are made at the margin.
> What is the production function? What does the short run production function hold constant?
> Although New York State is second only to Washington State in production of apples, its production has been declining during the past 20 years. The decline has been particularly steep in counties close to New York City. In 1985, there were more than 11,0
> What are implicit costs? How are they different from explicit costs?
> Distinguish between a firm’s fixed costs and variable costs and give an example of each.
> What is the difference between the short run and the long run? Is the amount of time that separates the short run from the long run the same for every firm?
> Suppose the market for ice cream cones is made up of three consumers: Tiago, Terrell, and Tim. Use the information in the following table to construct the market demand curve for ice cream cones. Show the information in a table and in a graph. Tiago
> The following table shows the hourly output per worker for Greece and Italy measured as quarts of olive oil and pounds of pasta. Calculate the opportunity cost of producing olive oil and pasta in both Greece and Italy. Output per Hour of Work Olive
> If you deposit $20,000 in a savings account at a bank, you might earn 1 percent interest per year. Someone who borrows $20,000 from a bank to buy a new car might have to pay an interest rate of 6 percent per year on the loan. Knowing this, why don’t you
> What is an externality? Are there externalities in the market for health care? Briefly explain.
> In an opinion column about improving the performance of doctors in the United States, a health economist observed that “it’s very hard to measure the things we really care about, like quality of life and improvements in functioning.” Why is it difficult
> What are network externalities? For what types of products are network externalities likely to be important? What is path dependence?
> The price elasticity of demand for crude oil in the United States has been estimated to be 20.06 in the short run and 20.45 in the long run. Why would the demand for crude oil be more price elastic in the long run than in the short run? Source: John C.
> Discuss the factors that determine the marginal cost of reducing crime. Discuss the factors that determine the marginal benefit of reducing crime. Would it be economically efficient to reduce the amount of crime to zero? Briefly explain.
> According to a Wall Street Journal article, many restaurant chains, including McDonald’s and Chick-fil-A, have begun serving only chickens that were raised without being fed antibiotics. Using this method of raising chickens increases their cost. Suppose
> An article in the Wall Street Journal discusses the visual effects industry, which is made up of firms that provide visual effects for films and television programs. The article notes: “Blockbusters … often have thousands of visual effects shots. Even dr
> Suppose that the curves in the following graph represent two supply curves for traditional chicken wings (basket of six) at Buffalo Wild Wings. What would cause a movement from point A to point B on S1? Name two variables that if their values were to cha
> According to Forbes magazine, in 2015 Bill Gates was the world’s richest person, with wealth of $79.2 billion. Does Bill Gates face scarcity? Does everyone? Are there any exceptions? Source: “The World’s Billionaires,” forbes.com, March 2, 2015.
> According to an article in Forbes, the cost of materials in Apple’s iPhone 6 with 16 gigabytes of memory was estimated to be $227. Apple was selling the iPhone 6 for $650. Most phone carriers, like AT&T and Verizon, made payments to Apple that reduced th
> The chapter states that “when the price of an inferior good falls, the income effect and substitution effect work in opposite directions.” Explain what this statement means.
> Briefly explain whether you agree with the following argument: “Unfortunately, Bolivia does not have a comparative advantage with respect to the United States in the production of any good or service.” (Hint: You do not need any specific information abou
> An article in the Wall Street Journal about the financial problems of the New York Metropolitan Opera contained the observation that “a ticket-price increase in 2012 backfired.” a. What does the author mean that the increase in ticket prices to the opera
> What is the difference between technology and technological change?
> Suppose you originally invested in a firm when it was small and un-profitable. Now the firm has grown to be large and profitable. Would you be better off if you had bought the firm’s stock or the firm’s bonds? Briefly explain.
> According to an article in the Economist about the health care system in the United Kingdom: “A defining principle of the National Health Service is that it is ‘free at the point of delivery.’” What does “free at the point of delivery” mean? Is health ca
> One study found that the price elasticity of demand for soda is 20.78, while the price elasticity of demand for Coca-Cola is 21.22. Coca-Cola is a type of soda, so why isn’t its price elasticity the same as the price elasticity for soda as a product? So
> If the marginal cost of reducing a certain type of pollution is zero, should all that type of pollution be eliminated? Briefly explain.
> Briefly explain whether you agree with the following statement: “If at the current quantity, marginal benefit is greater than marginal cost, there will be a deadweight loss in the market. However, there is no deadweight loss when marginal cost is greater
> Sony suffered losses for a decade selling televisions before finally earning a profit in 2014. Given the strong consumer demand for plasma, LCD, and LED television sets, shouldn’t Sony have been able to raise prices to earn a profit during that decade of
> According to a news story about the International Energy Agency, the agency forecast that “the current slide in [oil] prices won’t [reduce] global supply.” Would a decline in oil prices ever cause a reduction in the supply of oil? Briefly explain. Sourc
> Briefly explain whether each of the following statements describes a change in supply or a change in quantity supplied. a. To take advantage of high prices for snow shovels during a snowy winter, Alexander Shovels, Inc., decides to increase output. b. Th
> Considering only the income effect, if the price of an inferior good decline, would a consumer want to buy a larger quantity or a smaller quantity of the good? Does your answer mean that the demand curves for inferior goods should slope upward? Briefly e
> An article in the New York Times quoted an economist as arguing that “global free trade and the European single market … encourage countries to specialize in sectors where they enjoy comparative advantage. Germany’s [comparative advantage] is in cars and
> What is the economic definition of utility? Is it possible to measure utility?
> Suppose that instead of being highly inelastic, the demand for oil is highly elastic. a. Given the situation illustrated by the first graph in the Making the Connection on page 203, would the resulting price change be larger, smaller, or the same as the
> Some coal is mined by private companies on land owned by the federal government. Two economists writing in an opinion column argue, “The federal government should also take into account the economic consequences of burning coal when pricing this fuel. Th
> Suppose that a firm in which you have invested is losing money. Would you rather own the firm’s stock or the firm’s bonds? Briefly explain.
> What is meant by the phrase “health outcome”? How do health outcomes in the United States compare with those of other high-income countries? What problems arise in attempting to compare health outcomes across countries?
> According to a news story about the bus system in the Lehigh Valley in Pennsylvania, “Ridership fell 14 percent in 2012 after a 33 percent increase” in bus fares. Based on this information, is the demand for bus trips price elastic or price inelastic? Ex
> Is it ever possible for an increase in pollution to make society better off? Briefly explain, using a graph like Figure 5.3 on page 154. Figure 5.3: Cost or Here the marginal benefit from pollution reduction of $300 per ton is higher than the margina
> Briefly explain whether you agree with the following statement: “A lower price in a market always increases economic efficiency in that market.”
> What is the law of supply? What are the main variables that cause a supply curve to shift? Give an example of each.
> Suppose you read the following item in a newspaper article, under the headline “Price Gouging Alleged in Pencil Market”: Consumer advocacy groups charged at a press conference yesterday that there is widespread price gouging in the sale of pencils. They
