Question: Consider a monopolistically competitive market with

> As the chapter states, GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative measure of economic well-being?

> A college student has two options for meals: eating at the dining hall for $6 per meal, or eating a Cup O’ Soup for $1.50 per meal. Her weekly food budget is $60. a. Draw the budget constraint showing the trade-off between dining hall meals and Cups O’ S

> Give an example of a monetary policy rule. Why might your rule be better than discretionary policy? Why might it be worse?

> Explain why monetary and fiscal policy work with a lag. Why do these lags matter in the choice between active and passive policy?

> Give three examples of how our society discourages saving. What are the drawbacks of eliminating these disincentives?

> Explain how reducing a government budget deficit makes future generations better off. What fiscal policy might improve the lives of future generations more than reducing a government budget deficit?

> Explain what is meant by a good being “excludable.” Explain what is meant by a good being “rival in consumption.” Is a slice of pizza excludable? Is it rival in consumption?

> Define and give an example of a common resource. Without government intervention, will people use this good too much or too little? Why?

> What is cost–benefit analysis of public goods? Why is it important? Why is it hard?

> Define and give an example of a public good. Can the private market provide this good on its own? Explain.

> Wireless, high-speed Internet is provided for free in the airport of the city of Communityville. a. At first, only a few people use the service. What type of a good is this and why? b. Eventually, as more people find out about the service and start using

> Charlie loves watching Downton Abbey on his local public TV station, but he never sends any money to support the station during its fund-raising drives. a. What name do economists have for people like Charlie? b. How can the government solve the problem

> Both public goods and common resources involve externalities. a. Are the externalities associated with public goods generally positive or negative? Use examples in your answer. Is the free-market quantity of public goods generally greater or less than th

> Think about the goods and services provided by your local government. a. Using the classification in Figure 1, explain which category each of the following goods falls into: • police protection • snow plowing • education • rural roads • city streets b. W

> High-income people are willing to pay more than lower-income people to avoid the risk of death. For example, they are more likely to pay for safety features on cars. Do you think cost–benefit analysts should take this fact into account when evaluating pu

> Many transportation systems, such as the Washington, D.C., Metro (subway), charge higher fares during rush hours than during the rest of the day. Why might they do this?

> Sleek Sneakers Co. is one of many firms in the market for shoes. a. Assume that Sleek is currently earning short-run economic profit. On a correctly labeled diagram, show Sleek’s profit-maximizing output and price as well as the area representing profit.

> The nation of Wiknam has five million residents whose only activities are producing and consuming fish. They produce fish in two ways. Each person who works on a fish farm raises 2 fish per day. Each person who goes fishing in one of the nation’s many la

> Some economists argue that private firms will not undertake the efficient amount of basic scientific research. a. Explain why this might be so. In your answer, classify basic research in one of the categories shown in Figure 1. b. What sort of policy has

> Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch. Here is their willingness to pay for each film: a. Within the dorm room, is the showing of a movie a public good? Why or w

> Give an example of a private solution to an externality. • What is the Coase theorem? • Why are private economic participants sometimes unable to solve the problems caused by an externality?

> A glue factory and a steel mill emit smoke containing a chemical that is harmful if inhaled in large amounts. Describe three ways the town government might respond to this externality. What are the pros and cons of each solution?

> Give an example of a negative externality and a positive externality. Explain why market outcomes are inefficient in the presence of these externalities.

> In what way does the patent system help society solve an externality problem?

> Draw a supply-and-demand diagram to explain the effect of a negative externality that occurs as a result of a firm’s production process.

> Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your roommate smokes in the room? Is this outcome efficient? How do you and your roommate reach this solution?

> What are corrective taxes? Why do economists prefer them to regulations as a way to protect the environment from pollution?

> For each of the following pairs of firms, explain which firm would be more likely to engage in advertising. a. a family-owned farm or a family-owned restaurant b. a manufacturer of forklifts or a manufacturer of cars c. a company that invented a very com

> A local drama company proposes a new neighborhood theater in San Francisco. Before approving the building permit, the city planner completes a study of the theater’s impact on the surrounding community a. One finding of the study is that theaters attract

> Consider the market for fire extinguishers. a. Why might fire extinguishers exhibit positive externalities? b. Draw a graph of the market for fire extinguishers, labeling the demand curve, the social-value curve, the supply curve, and the social-cost cur

> Consider two ways to protect your car from theft. The Club (a steering wheel lock) makes it difficult for a car thief to take your car. Lojack (a tracking system) makes it easier for the police to catch the car thief who has stolen it. Which of these typ

> There are three industrial firms in Happy Valley. The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits. a. Who sells permits and how many do they sell? Who buys permits and how many do they buy? Bri

> Suppose that the government decides to issue tradable permits for a certain form of pollution. a. Does it matter for economic efficiency whether the government distributes or auctions the permits? Why or why not? b. If the government chooses to distribut

> Figure 4 shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by setting a price with a corrective tax or by setting a quantity with pollution permits. Suppose there is a sharp improvement in

> Ringo loves playing rock ‘n’ roll music at high volume. Luciano loves opera and hates rock ‘n’ roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls. a. What is the externality here? b. What command-and-control

> The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment: First ………..bottle $5 Second…….. bottle 4 Third ………..bottle 3 Fourth ……….bottle 2 Fifth ………...bottle 1 Further ……….

> Many observers believe that the levels of pollution in our society are too high. a. If society wishes to reduce overall pollution by a certain amount, why is it efficient to have different amounts of reduction at different firms? b. Command-and-control a

> Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people who do not drink and drive. a. Illustrate the market for alcohol, labeling the demand curve, the social-value curve, the supply curve, the social-cost

> The market for peanut butter in Nutville is monopolistically competitive and in long-run equilibrium One day, consumer advocate Skippy Jif discovers that all brands of peanut butter in Nutville are identical. Thereafter, the market becomes perfectly comp

> The textile industry of Autarka advocates a ban on the import of wool suits. Describe five arguments its lobbyists might make. Give a response to each of these arguments.

> Draw a supply-and-demand diagram for wool suits in the country of Autarka. When trade is allowed, the price of a suit falls from 3 to 2 ounces of gold. In your diagram, show the change in consumer surplus, the change in producer surplus, and the change i

> When does a country become an exporter of a good? An importer?

> What is the difference between the unilateral and multilateral approaches to achieving free trade? Give an example of each.

> List five arguments often given to support trade restrictions. How do economists respond to these arguments?

> Describe what a tariff is and its economic effects.

> Draw the supply-and-demand diagram for an importing country. What is consumer surplus and producer surplus before trade is allowed? What is consumer surplus and producer surplus with free trade? What is the change in total surplus?

> China is a major producer of grains, such as wheat, corn, and rice. In 2008, the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports. a. Draw the graph that describes the mar

> The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $20, and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam Smith’s The Wealth of Nations while on vacation, the preside

> Consider the arguments for restricting trade. a. Imagine that you are a lobbyist for timber, an established industry suffering from low-priced foreign competition, and you are trying to get Congress to pass trade restrictions. Which two or three of the f

> When China’s clothing industry expands, the increase in world supply lowers the world price of clothing. a. Draw an appropriate diagram to analyze how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that imp

> Suppose that Congress imposes a tariff on imported autos to protect the U.S. auto industry from foreign competition. Assuming that the United States is a price taker in the world auto market, show the following on a diagram: the change in the quantity of

> The world price of wine is below the price that would prevail in Canada in the absence of trade. a. Assuming that Canadian imports of wine are a small part of total world wine production, draw a graph for the Canadian market for wine under free trade. Id

> Consider a small country that exports steel. Suppose that a “pro-trade” government decides to subsidize the export of steel by paying a certain amount for each ton sold abroad. How does this export subsidy affect the domestic price of steel, the quantity

> Assume the United States is an importer of televisions and there are no trade restrictions. U.S. consumers buy 1 million televisions per year, of which 400,000 are produced domestically and 600,000 are imported. a. Suppose that a technological advance am

> Having rejected a tariff on textiles (a tax on imports), the president of Isoland is now considering the same-sized tax on textile consumption (including both imported and domestically produced textiles). a. Using Figure 4, identify the quantity consumed

> Kawmin is a small country that produces and consumes jelly beans. The world price of jelly beans is $1 per bag, and Kawmin’s domestic demand and supply for jelly beans are governed by the following equations: Demand: QD = 8 − P Supply: QS = P, where P is

> Consider a country that imports a good from abroad. For each of following statements, state whether it is true or false. Explain your answer. a. “The greater the elasticity of demand, the greater the gains from trade.” b. “If demand is perfectly inelasti

> If the government doubles the tax on gasoline, can you be sure that revenue from the gasoline tax will rise? Can you be sure that the deadweight loss from the gasoline tax will rise? Explain.

> Draw the supply and demand curves for cookies. If the government imposes a tax on cookies, show what happens to the price paid by buyers, the price received by sellers, and the quantity sold. In your diagram, show the deadweight loss from the tax. Explai

> Sparkle is one firm of many in the market for toothpaste, which is in long-run equilibrium. a. Draw a diagram showing Sparkle’s demand curve, marginal-revenue curve, average-total-cost curve, and marginal-cost curve. Label Sparkle’s profit maximizing out

> Draw a supply-and-demand diagram with a tax on the sale of a good. Show the deadweight loss. Show the tax revenue.

> What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus compare to the tax revenue? Explain.

> Why do experts disagree about whether labor taxes have small or large deadweight losses?

> How do the elasticities of supply and demand affect the deadweight loss of a tax? Why do they have this effect?

> Consider the market for rubber bands. a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use the tools of consumer surplus and producer surplus in

> Evaluate the following two statements. Do you agree? Why or why not? a. “A tax that has no deadweight loss cannot raise any revenue for the government.” b. “A tax that raises no revenue for the government cannot have any deadweight loss.”

> The market for pizza is characterized by a downward sloping demand curve and an upward-sloping supply curve. a. Draw the competitive market equilibrium. Label the price, quantity, consumer surplus, and producer surplus. Is there any deadweight loss? Expl

> Suppose that a market is described by the following supply and demand equations: QS = 2P QD = 300 - P a. Solve for the equilibrium price and the equilibrium quantity. b. Suppose that a tax of T is placed on buyers, so the new demand equation is QD = 300

> Hotel rooms in Small town go for $100, and 1,000 rooms are rented on a typical day a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room. After the tax is imposed, the going rate for hotel rooms rises to $108, and the numbe

> This chapter analyzed the welfare effects of a tax on a good. Consider now the opposite policy. Suppose that the government subsidizes a good: For each unit of the good sold, the government pays $2 to the buyer. How does the subsidy affect consumer surpl

> You are hired as the consultant to a monopolistically competitive firm. The firm reports the following information about its price, marginal cost, and average total cost. Can the firm possibly be maximizing profit? If not, what should it do to increase p

> The government places a tax on the purchase of socks. a. Illustrate the effect of this tax on equilibrium price and quantity in the socks market. Identify the following areas both before and after the imposition of the tax: total spending by consumers, t

> Daniel Patrick Moynihan, the late senator from New York, once introduced a bill that would levy a 10,000 percent tax on certain hollow-tipped bullets. a. Do you expect that this tax would raise much revenue? Why or why not? b. Even if the tax would raise

> After economics class one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic. In what sense is taxing food a “good” way to raise revenue? In what sense is it not a “good” way to

> Suppose that the government imposes a tax on heating oil. a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain. b. Would the revenue collected from this tax likely be greater in

> Draw a demand curve for turkey. In your diagram, show a price of turkey and the consumer surplus at that price. Explain in words what this consumer surplus measures.

> Draw the supply and demand curves for turkey. In the equilibrium, show producer and consumer surplus. Explain why producing more turkeys would lower total surplus.

> Draw a supply curve for turkey. In your diagram, show a price of turkey and the producer surplus at that price. Explain in words what this producer surplus measures.

> Explain how buyers’ willingness to pay, consumer surplus, and the demand curve are related.

> Name two types of market failure. Explain why each may cause market outcomes to be inefficient.

> What is efficiency? Is it the only goal of economic policymakers?

> For each of the following characteristics, say whether it describes a monopoly firm, a monopolistically competitive firm, both, or neither. a. faces a downward-sloping demand curve b. has marginal revenue less than price c. faces the entry of new firms s

> Consider how health insurance affects the quantity of healthcare services performed. Suppose that the typical medical procedure has a cost of $100, yet a person with health insurance pays only $20 out of pocket. Her insurance company pays the remaining $

> A friend of yours is considering two cell phone service providers. Provider A charges $120 per month for the service regardless of the number of phone calls made. Provider B does not have a fixed service fee but instead charges $1 per minute for calls. Y

> One of the largest changes in the economy over the past several decades is that technological advances have reduced the cost of making computers. a. Draw a supply-and-demand diagram to show what happened to price, quantity, consumer surplus, and producer

> There are four consumers willing to pay the following amounts for haircuts: There are four haircutting businesses with the following costs: Each firm has the capacity to produce only one haircut. For efficiency, how many haircuts should be given? Whi

> The cost of producing flat-screen TVs has fallen over the past decade. Let’s consider some implications of this fact. a. Draw a supply-and-demand diagram to show the effect of falling production costs on the price and quantity of flat-screen TVs sold. b.

> Explain how sellers’ costs, producer surplus, and the supply curve are related.

> Ernie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water: Cost of first bottle $1 Cost

> It is a hot day, and Bert is thirsty. Here is the value he places on each bottle of water: Value of first bottle $7 Value of second bottle $5 Value of third bottle $3 Value of fourth bottle $1 a. From this information, derive Bert’s demand schedule. Grap

> Suppose the demand for French bread rises. Explain what happens to producer surplus in the market for French bread. Explain what happens to producer surplus in the market for flour. Illustrate your answers with diagrams.

> An early freeze in California sours the lemon crop. Explain what happens to consumer surplus in the market for lemons. Explain what happens to consumer surplus in the market for lemonade. Illustrate your answers with diagrams.

> For each of the following characteristics, say whether it describes a perfectly competitive firm, a monopolistically competitive firm, both, or neither. a. sells a product differentiated from that of its competitors b. has marginal revenue less than pric

> Melissa buys an iPhone for $120 and gets consumer surplus of $80. a. What is her willingness to pay? b. If she had bought the iPhone on sale for $90, what would her consumer surplus have been? c. If the price of an iPhone were $250, what would her consum

> Define oligopoly and monopolistic competition and give an example of each.

> How might advertising make markets less competitive? How might it make markets more competitive? • Give the arguments for and against brand names.

> Explain how a monopolist chooses the quantity of output to produce and the price to charge.

> What are the three reasons that a market might have a monopoly? • Give two examples of monopolies and explain the reason for each.

> Describe the ways policymakers can respond to the inefficiencies caused by monopolies. List a potential problem with each of these policy responses.

> Give two examples of price discrimination. • How does perfect price discrimination affect consumer surplus, producer surplus, and total surplus?