Four firms located at different points on a river dump various quantities of effluent into it. The effluent adversely affects the quality of swimming for homeowners who live downstream. These people can build swimming pools to avoid swimming in the river, and the firms can purchase filters that eliminate harmful chemicals dumped in the river. As a policy advisor for a regional planning organization, how would you compare and contrast the following options for dealing with the harmful effect of the effluent: a. An equal-rate effluent fee on firms located on the river. b. An equal standard per firm on the level of effluent that each can dump. c. A transferable effluent permit system in which the aggregate level of effluent is fixed and all firms receive identical permits.
> Why is the pricing of a Gillette safety razor a form of two-part tariff? Must Gillette be a monopoly producer of its blades as well as its razors? Suppose you were advising Gillette on how to determine the two parts of the tariff. What procedure would yo
> How can a firm determine an optimal two-part tariff if it has two customers with different demand curves?
> How is peak-load pricing a form of price discrimination? Can it make consumers better off? Give an example.
> When pricing automobiles, American car companies typically charge a much higher percentage markup over cost for “luxury option” items (such as leather trim, etc.) than for the car itself or for more “basic” options such as power steering and automatic tr
> How do the antitrust laws limit market power in the United States? Give examples of major provisions of the laws.
> Show why optimal, third-degree price discrimination requires that marginal revenue for each group of consumers equals marginal cost. Use this condition to explain how a firm should change its prices and total output if the demand curve for one group of c
> Why is there a social cost to monopsony power? If the gains to buyers from monopsony power could be redistributed to sellers, would the social cost of monopsony power be eliminated? Explain briefly.
> What are some sources of monopsony power? What determines the amount of monopsony power an individual firm is likely to have?
> What is meant by the term “monopsony power”? Why might a firm have monopsony power even if it is not the only buyer in the market?
> How should a monopsonist decide how much of a product to buy? Will it buy more or less than a competitive buyer? Explain briefly.
> Why will a monopolist’s output increase if the government forces it to lower its price? If the government wants to set a price ceiling that maximizes the monopolist’s output, what price should it set?
> Why is there a social cost to monopoly power? If the gains to producers from monopoly power could be redistributed to consumers, would the social cost of monopoly power be eliminated? Explain briefly.
> What factors determine the amount of monopoly power an individual firm is likely to have? Explain each one briefly.
> What are some of the different types of barriers to entry that give rise to monopoly power? Give an example of each.
> A monopolist faces the following demand curve: Q = 144/P2 where Q is the quantity demanded and P is price. Its average variable cost is AVC = Q1/2 and its fixed cost is 5. a. What are its profit-maximizing price and quantity? What is the resulting pro
> A certain town in the Midwest obtains all of its electricity from one company, Northstar Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the
> Suppose that BMW can produce any quantity of cars at a constant marginal cost equal to $20,000 and a fixed cost of $10 billion. You are asked to advise the CEO as to what prices and quantities BMW should set for sales in Europe and in the United States.
> There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of Q = 50 – P. Lake Wobegon Electric’s (LWE) cost of producing electricity is TC = 500 + Q. a. If the regulators of LWE want to make sure that there is no deadweight
> Dayna’s Doorstops, Inc. (DD) is a monopolist in the doorstop industry. Its cost is C = 100 – 5Q + Q2, and demand is P = 55 – 2Q. a. What price should DD set to maximize profit? What output does the firm produce? How much profit and consumer surplus does
> The employment of teaching assistants (TAs) by major universities can be characterized as a monopsony. Suppose the demand for TAs is W = 30,000 – 125n, where W is the wage (as an annual salary), and n is the number of TAs hired. The supply of TAs is give
> You produce widgets for sale in a perfectly competitive market at a market price of $10 per widget. Your widgets are manufactured in two plants, one in Massachusetts and the other in Connecticut. Because of labor problems in Connecticut, you are forced t
> Michelle’s Monopoly Mutant Turtles (MMMT) has the exclusive right to sell Mutant Turtle t-shirts in the United States. The demand for these t-shirts is Q = 10,000/P2. The firm’s short-run cost is SRTC = 2000 + 5Q, and its long-run cost is LRTC = 6Q. a.
> A monopolist faces the demand curve P = 11 – Q, where P is measured in dollars per unit and Q in thousands of units. The monopolist has a constant average cost of $6 per unit. a. Draw the average and marginal revenue curves and the average and marginal c
> One of the more important antitrust cases of the 20th century involved the Aluminum Company of America (Alcoa) in 1945. At that time, Alcoa controlled about 90 percent of primary aluminum production in the United States, and the company had been accused
> A drug company has a monopoly on a new patented medicine. The product can be made in either of two plants. The costs of production for the two plants are MC1 = 20 + 2Q1 and MC2 = 10 + 5Q2. The firm’s estimate of demand for the product is P = 20 – 3(Q1 +
> A firm has two factories for which costs are given by: Factory #1: C1(Q1) = 10Q12 Factory #2: C2(Q2) = 20Q22 The firm faces the following demand curve: P = 700 – 5Q where Q is total output – i.e., Q = Q1 + Q2. a. On a diagram, draw the marginal cost c
> Suppose a profit-maximizing monopolist is producing 800 units of output and is charging a price of $40 per unit. a. If the elasticity of demand for the product is –2, find the marginal cost of the last unit produced. b. What is the firm’s percentage ma
> In Example 11.1, we saw how producers of processed foods and related consumer goods use coupons as a means of price discrimination. Although coupons are widely used in the United States, that is not the case in other countries. In Germany, coupons are il
> Suppose that an industry is characterized as follows: C = 100 + 2q2………….each firm’s total cost function MC = 4q………………..firm’s marginal cost function P = 90 – 2Q…………… industry demand curve MR = 90 – 4Q……industry marginal revenue curve a. If there is
> The following table shows the demand curve facing a monopolist who produces at a constant marginal cost of $10: Price…….……………………………………………………………Quantity 18………………………………………………………………………………...0 16..…………………………………………………………………………………4 14..………………………………………………………………
> A firm faces the following average revenue (demand) curve: P = 120 – 0.02Q where Q is weekly production and P is price, measured in cents per unit. The firm’s cost function is given by C = 60Q + 25,000. Assume that the firm maximizes profits. a. What
> A monopolist firm faces a demand with constant elasticity of –2.0. It has a constant marginal cost of $20 per unit and sets a price to maximize profit. If marginal cost should increase by 25 percent, would the price charged also rise by 25 percent?
> Caterpillar Tractor, one of the largest producers of farm machinery in the world, has hired you to advise it on pricing policy. One of the things the company would like to know is how much a 5-percent increase in price is likely to reduce sales. What wou
> Will an increase in the demand for a monopolist’s product always result in a higher price? Explain. Will an increase in the supply facing a monopsonist buyer always result in a lower price? Explain.
> Externalities arise solely because individuals are unaware of the consequences of their actions. Do you agree or disagree? Explain.
> Consider a market in which a firm has monopoly power. Suppose in addition that the firm produces under the presence of either a positive or a negative externality. Does the externality necessarily lead to a greater misallocation of resources?
> When do externalities require government intervention? When is such intervention unlikely to be necessary?
> Compare and contrast the following three mechanisms for treating pollution externalities when the costs and benefits of abatement are uncertain: (a) an emissions fee, (b) an emissions standard, and (c) a system of transferable emissions permits.
> If the demand for drive-in movies is more elastic for couples than for single individuals, it will be optimal for theaters to charge one admission fee for the driver of the car and an extra fee for passengers. True or false? Explain.
> A monopolist is producing at a point at which marginal cost exceeds marginal revenue. How should it adjust its output to increase profit?
> Which of the following describes an externality and which does not? Explain the difference. a. A policy of restricted coffee exports in Brazil causes the U.S. price of coffee to rise – an increase which in turn also causes the price of tea to rise. b. A
> Explain why the median voter outcome need not be efficient when majority-rule voting determines the level of public spending.
> Public television is funded in part by private donations, even though anyone with a television set can watch for free. Can you explain this phenomenon in light of the free rider problem?
> A village is located next to 1000 acres of prime grazing land. The village presently owns the land and allows all residents to graze cows freely. Some members of the village council have suggested that the land is being overgrazed. Is this likely to be t
> Public goods are both nonrival and nonexclusive. Explain each of these terms and show clearly how they differ from each other.
> Why does free access to a common property resource generate an inefficient outcome?
> An emissions fee is paid to the government, whereas an injurer who is sued and held liable pays damages directly to the party harmed by an externality. What differences in the behavior of victims might you expect to arise under these two arrangements?
> George and Stan live next door to each other. George likes to plant flowers in his garden, but every time he does, Stan’s dog comes over and digs them up. Stan’s dog is causing the damage, so if economic efficiency is to be achieved, it is necessary that
> To encourage an industry to produce at the socially optimal level, the government should impose a unit tax on output equal to the marginal cost of production. True or false? Explain.
> Price discrimination requires the ability to sort customers and the ability to prevent arbitrage. Explain how the following can function as price discrimination schemes and discuss both sorting and arbitrage: a. Requiring airline travelers to spend at l
> Assume that scientific studies provide you with the following information concerning the benefits and costs of sulfur dioxide emissions: Benefits of abating (reducing) emissions: MB = 500 – 20A Costs of abating emissions: MC = 200 + 5A where A is the q
> A computer programmer lobbies against copyrighting software, arguing that everyone should benefit from innovative programs written for personal computers and that exposure to a wide variety of computer programs will inspire young programmers to create ev
> A number of firms have located in the western portion of a town after single-family residences took up the eastern portion. Each firm produces the same product and in the process emits noxious fumes that adversely affect the residents of the community.
> The Georges Bank, a highly productive fishing area off New England, can be divided into two zones in terms of fish population. Zone 1 has the higher population per square mile but is subject to severe diminishing returns to fishing effort. The daily fish
> Reconsider the common resource problem given in Example 18.7 given blow. Suppose that crawfish popularity continues to increase, and that the demand curve shifts from C = 0.401 – 0.0064F to C = 0.50 – 0.0064F. How does
> There are three groups in a community. Their demand curves for public television in hours of programming, T, are given respectively by W 1 = $200 – T, W 2 = $240 – 2T, W 3 = $320 – 2T. Suppose public television is a pure public good that can be produce
> A beekeeper lives adjacent to an apple orchard. The orchard owner benefits from the bees because each hive pollinates about one acre of apple trees. The orchard owner pays nothing for this service, however, because the bees come to the orchard without hi
> Refer back to Example 18.5 given below on global warming. Table 18.3 shows the annual net benefits from a policy that reduces GHG emissions by 1 percent per year. At what discount rate is the NPV of this policy just equal to zero? EXAMPLE 18.5 GLOBAL
> In a market for dry cleaning, the inverse market demand function is given by P=100−Q and the (private) marginal cost of production for the aggregation of all dry cleaning firms is given by MC=10+Q. Finally, the pollution generated by the dry cleaning pro
> The market for paper in a particular region in the United States is characterized by the following demand and supply curves QD =160,000−2000P and QS = 40,000+2000P, where QD is the quantity demanded in 100-pound lots, QS is the quantity supplied in 100p
> Consider a firm with monopoly power that faces the demand curve P = 100 – 3Q + 4A1/2 and has the total cost function C = 4Q2 + 10Q + A where A is the level of advertising expenditures, and P and Q are price and output. a. Find the values of A, Q, and P
> Medical research has shown the negative health effects of “secondhand” smoke. Recent social trends point to growing intolerance of smoking in public areas. If you are a smoker and you wish to continue smoking despite tougher anti-smoking laws, describe t
> Why might managers be able to achieve objectives other than profit maximization, which is the goal of the firm’s shareholders?
> Explain the difference between adverse selection and moral hazard in insurance markets. Can one exist without the other?
> If the used car market is a “lemons” market, how would you expect the repair record of used cars that are sold to compare with the repair record of those not sold?
> Why can asymmetric information between buyers and sellers lead to market failure when a market is otherwise perfectly competitive?
> What is an efficiency wage? Why is it profitable for the firm to pay it when workers have better information about their productivity than firms do?
> Why are bonus and profit-sharing payment schemes likely to resolve principal-agent problems, whereas a fixed-wage payment will not?
> How can the principal-agent model be used to explain why public enterprises, such as post offices, might pursue goals other than profit maximization?
> Joe earned a high grade-point average during his four years of college. Is this achievement a strong signal to Joe’s future employer that he will be a highly productive worker? Why or why not?
> Why might a seller find it advantageous to signal the quality of a product? How are guarantees and warranties a form of market signaling?
> A cable TV company offers, in addition to its basic service, two products: a Sports Channel (Product 1) and a Movie Channel (Product 2). Subscribers to the basic service can subscribe to these additional services individually at the monthly prices P1 and
> Describe several ways in which sellers can convince buyers that their products are of high quality. Which methods apply to the following products: Maytag washing machines, Burger King hamburgers, large diamonds?
> Faced with a reputation for producing automobiles with poor repair records, a number of American companies have offered extensive guarantees to car purchasers (e.g., a seven year warranty on all parts and labor associated with mechanical problems). a. I
> Professor Jones has just been hired by the economics department at a major university. The president of the board of regents has stated that the university is committed to providing top-quality education for undergraduates. Two months into the semester,
> A major university bans the assignment of D or F grades. It defends its action by claiming that students tend to perform above average when they are free from the pressures of flunking out. The university states that it wants all its students to get As a
> Gary is a recent college graduate. After six months at his new job, he has finally saved enough to buy his first car. a. Gary knows very little about the differences between makes and models. How could he use market signals, reputation, or standardizati
> Many consumers view a well-known brand name as a signal of quality and will pay more for a brand-name product (e.g., Bayer aspirin instead of generic aspirin, Birds Eye frozen vegetables instead of the supermarket’s own brand). Can a brand name provide a
> A firm’s short-run revenue is given by R = 10e – e2, where e is the level of effort by a typical worker (all workers are assumed to be identical). A worker chooses his level of effort to maximize wage less effort w – e (the per-unit cost of effort is ass
> As Chairman of the Board of ASP Industries, you estimate that your annual profit is given by the table below. Profit (Î ) is conditional upon market demand and the effort of your new CEO. The probabilities of each demand condition occurring ar
> Two used car dealerships compete side by side on a main road. The first, Harry’s Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it costs Harry’s $8000 to buy and service each car that it sells. Th
> You have seen how asymmetric information can reduce the average quality of products sold in a market, as low-quality products drive out high-quality products. For those markets in which asymmetric information is prevalent, would you agree or disagree wi
> Your firm produces two products, the demands for which are independent. Both products are produced at zero marginal cost. You face four consumers (or groups of consumers) with the following reservation prices: a. Consider three alternative pricing strate
> An insurance company is considering issuing three types of fire insurance policies: (i) complete insurance coverage, (ii) complete coverage above and beyond a $10,000 deductible, and (iii) 90 percent coverage of all losses. Which policy is more likel
> To promote competition and consumer welfare, the Federal Trade Commission requires firms to advertise truthfully. How does truth in advertising promote competition? Why would a market be less competitive if firms advertised deceptively?
> In the analysis of exchange using the Edgeworth box diagram, explain why both consumers’ marginal rates of substitution are equal at every point on the contract curve.
> In the Edgeworth box diagram, explain how one point can simultaneously represent the market baskets owned by two consumers.
> Why can feedback effects make a general equilibrium analysis substantially different from a partial equilibrium analysis?
> What are the four major sources of market failure? Explain briefly why each prevents the competitive market from operating efficiently.
> Do you agree or disagree with each of the following statements? Explain. a. If it is possible to exchange 3 pounds of cheese for 2 bottles of wine, then the price of cheese is 2/3 the price of wine. b. A country can only gain from trade if it can produc
> If Country A has an absolute advantage in the production of two goods compared to Country B, then it is not in Country A’s best interest to trade with country B. True or false? Explain.
> Why can free trade between two countries make consumers of both countries better off?
> Explain why goods will not be distributed efficiently among consumers if the MRT is not equal to the consumers’ marginal rate of substitution.
> You are selling two goods, 1 and 2, to a market consisting of three consumers with reservation prices as follows: The unit cost of each product is $30. a. Compute the optimal prices and profits for (i) selling the goods separately, (ii) pure bundling, an
> What is the marginal rate of transformation (MRT)? Explain why the MRT of one good for another is equal to the ratio of the marginal costs of producing the two goods.
> How is the production possibilities frontier related to the production contract curve?
> In the Edgeworth production box diagram, what conditions must hold for an allocation to be on the production contract curve? Why is a competitive equilibrium on the contract curve?
> How does the utility possibilities frontier relate to the contract curve?
> “Because all points on a contract curve are efficient, they are all equally desirable from a social point of view.” Do you agree with this statement? Explain.
> Jennifer and Drew consume orange juice and coffee. Jennifer’s MRS of orange juice for coffee is 1 and Drew’s MRS of orange juice for coffee is 3. If the price of orange juice is $2 and the price of coffee is $3, which market is in excess demand? What do
