Question: Name two types of market failure. Explain

> 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

> Consider a monopolistically competitive market with N firms. Each firm’s business opportunities are described by the following equations: Demand: Q = 100/N − P Marginal Revenue: MR = 100/N − 2Q Total Cost: TC = 50 +

> 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.

> 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?

> How does a monopolist’s quantity of output compare to the quantity of output that maximizes total surplus? How does this difference relate to the concept of deadweight loss?

> Draw the demand, marginal-revenue, average-total cost, and marginal-cost curves for a monopolist. Show the profit-maximizing level of output, the profit maximizing price, and the amount of profit.

> List the three key attributes of monopolistic competition. Draw and explain a diagram to show the long-run equilibrium in a monopolistically competitive market. How does this equilibrium differ from that in a perfectly competitive market?

> Why is a monopolist’s marginal revenue less than the price of its good? Can marginal revenue ever be negative? Explain.

> Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain.

> Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost.

> Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy

> In your diagram from the previous question, show the level of output that maximizes total surplus. Show the deadweight loss from the monopoly. Explain your answer.

> You live in a town with 300 adults and 200 children, and you are thinking about putting on a play to entertain your neighbors and make some money. A play has a fixed cost of $2,000, but selling an extra ticket has zero marginal cost. Here are

> Consider the relationship between monopoly pricing and price elasticity of demand. a. Explain why a monopolist will never produce a quantity at which the demand curve is inelastic. (Hint: If demand is inelastic and the firm raises its price, what happens

> The residents of the town Ectenia all love economics, and the mayor proposes building an economics museum. The museum has a fixed cost of $2,400,000 and no variable costs. There are 100,000 town residents, and each has the same demand for museum visits:

> Larry, Curly, and Moe run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Curly wants the saloon to bring in as much revenue as possible. Moe wants to make the largest possible profits. Using a single diagram

> A company is considering building a bridge across a river. The bridge would cost $2 million to build and nothing to maintain. The following table shows the company’s anticipated demand over the lifetime of the bridge: Price per Crossing….. Number of Cro

> Draw a diagram depicting a firm that is making a profit in a monopolistically competitive market. Now show what happens to this firm as new firms enter the industry.

> Johnny Rockabilly has just finished recording his latest CD. His record company’s marketing department determines that the demand for the CD is as follows: Price ……..…… Number of CDs $24 …………………………10,000 22 …………………………20,000 20 …………………………30,000 18 ………………

> A small town is served by many competing supermarkets, which have the same constant marginal cost. a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and total surplus. b. Now suppose that the independent superma

> A publisher faces the following demand schedule for the next novel from one of its popular authors: Price Quantity ……...… Demanded $100……………………… 0 novels 90………………………… 100,000 80………………………… 200,000 70………………………… 300,000 60………………………… 400,000 50………………………… 50

> Many schemes for price discriminating involve some cost. For example, discount coupons take up the time and resources of both the buyer and the seller. This question considers the implications of costly price discrimination. To keep things simple, let’s

> Based on market research, a film production company in Ectenia obtains the following information about the demand and production costs of its new DVD: Demand: P = 1,000 − 10Q Total Revenue: TR = 1,000Q − 10Q2 Marginal Revenue: MR = 1,000 − 20Q Marginal 

> Only one firm produces and sells soccer balls in the country of Wiknam, and as the story begins, international trade in soccer balls is prohibited. The following equations describe the monopolist’s demand, marginal revenue, total cost, and marginal cost:

> How does a competitive firm determine its profit-maximizing level of output? Explain. • When does a profit-maximizing competitive firm decide to shut down? When does it decide to exit a market?

> In the long run with free entry and exit, is the price in a market equal to marginal cost, average total cost, both, or neither? Explain with a diagram.

> Draw the cost curves for a typical firm. Explain how a competitive firm chooses the level of output that maximizes profit. At that level of output, show on your graph the firm’s total revenue and total costs.

> Does a competitive firm’s price equal the minimum of its average total cost in the short run, in the long run, or both? Explain.

> Describe the three attributes of monopolistic competition. How is monopolistic competition like monopoly? How is it like perfect competition?

> Does a competitive firm’s price equal its marginal cost in the short run, in the long run, or both? Explain.

> Ball Bearings, Inc. faces costs of production as follows: a. Calculate the company’s average fixed costs, average variable costs, average total costs, and marginal costs at each level of production. b. The price of a case of ball bear

> Consider total cost and total revenue given in the following table: a. Calculate profit for each quantity. How much should the firm produce to maximize profit? b. Calculate marginal revenue and marginal cost for each quantity. Graph them. (Hint: Put th

> Bob’s lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $27 each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can you say about Bob’s short-run decision regarding shutdown and

> Many small boats are made of fiberglass, which is derived from crude oil. Suppose that the price of oil rises. a. Using diagrams, show what happens to the cost curves of an individual boat-making firm and to the market supply curve. b. What happens to th

> An industry currently has 100 firms, each of which has fixed costs of $16 and average variable costs as follows: Quantity ……………………Average Variable Cost 1$.......................................................1 2.........................................