Suppose the government removes a tax on buyers of a good and levies a tax of the same size on sellers of the good. How does this change in tax policy affect the price that buyers pay sellers for this good, the amount buyers are out of pocket (including any tax payments they make), the amount sellers receive (net of any tax payments they make), and the quantity of the good sold?
> 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.........................................
> Suppose that the U.S. textile industry is competitive and there is no international trade in textiles. In long run equilibrium, the price per unit of cloth is $30. a. Describe the equilibrium using graphs for the entire market and for an individual produ
> The market for apple pies in the city of Ectenia is competitive and has the following demand schedule: Price Quantity ………………….…….Demanded $1 ………………………………………….….1,200 pies 2 …………………………………………….……….1,100 3 ……………….………………………..………….1,000 4……………………………………………………
> The market for fertilizer is perfectly competitive. Firms in the market are producing output but are currently incurring economic losses. a. How does the price of fertilizer compare to the average total cost, the average variable cost, and the marginal c
> A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total cost of $8, and fixed costs of $200. a. What is its profit? b. What is its marginal cost? c. What is its average var
> Explain two benefits that might arise from the existence of brand names.
> Suppose the book-printing industry is competitive and begins in a long-run equilibrium. a. Draw a diagram showing the average total cost, marginal cost, marginal revenue, and supply curve of the typical firm in the industry. b. Hi-Tech Printing Company i
> Farmer McDonald gives banjo lessons for $20 an hour. One day, he spends 10 hours planting $100 worth of seeds on his farm. What opportunity cost has he incurred? What cost would his accountant measure? If these seeds yield $200 worth of crops, does McDon
> If Boeing produces 9 jets per month, its long-run total cost is $9.0 million per month. If it produces 10 jets per month, its long-run total cost is $9.5 million per month. Does Boeing exhibit economies or diseconomies of scale?
> Suppose Honda’s total cost of producing 4 cars is $225,000 and its total cost of producing 5 cars is $250,000. What is the average total cost of producing 5 cars? What is the marginal cost of the fifth car? Draw the marginal-cost curve and the average to
> If Farmer Jones plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 3 bushels of wheat. If he plants 2 bags, he gets 5 bushels. If he plants 3 bags, he gets 6 bushels. A bag of seeds costs $100, and seeds are his only co
> Define total cost, average total cost, and marginal cost. How are they related?
> Draw a production function that exhibits diminishing marginal product of labor. Draw the associated total cost curve. (In both cases, be sure to label the axes.) Explain the shapes of the two curves you have drawn.
> Give an example of an opportunity cost that an accountant might not count as a cost. Why would the accountant ignore this cost?
> Define economies of scale and explain why they might arise. Define diseconomies of scale and explain why they might arise.
> How and why does a firm’s average-total-cost curve differ in the short run and in the long run?
> Does a monopolistic competitor produce too much or too little output compared to the most efficient level? What practical considerations make it difficult for policymakers to solve this problem?
> Draw the marginal-cost and average-total-cost curves for a typical firm. Explain why the curves have the shapes that they do and why they cross where they do.
> Consider the following cost information for a pizzeria: a. What is the pizzeria’s fixed cost? b. Construct a table in which you calculate the marginal cost per dozen pizzas using the information on total cost. Also, calculate the marg
> Nimbus, Inc., makes brooms and then sells them door to-door. Here is the relationship between the number of workers and Nimbus’s output in a given day: a. Fill in the column of marginal products. What pattern do you see? How might you
> A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught: Hours…………..Quantity of Fish (in pounds) 0 ………………………………………………………0 1 ………………………………………………………10 2 ………………………………………………………18 3 ………………………………………
> Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant. a. Define opportunity cost. b.
> Consider the following table of long-run total costs for three different firms: Does each of these firms experience economies of scale or diseconomies of scale? Quantity 2 4 5 6 7 Firm A $60 $70 $80 $90 $100 $110 $120 Firm B 11 24 39 56 75 96 119 F
> Jane’s Juice Bar has the following cost schedules: a. Calculate average variable cost, average total cost, and marginal cost for each quantity. b. Graph all three curves. What is the relationship between the marginal-cost curve and th
> The city government is considering two tax proposals: • A lump-sum tax of $300 on each producer of hamburgers. • A tax of $1 per burger, paid by producers of hamburgers. a. Which of the following curves—average fixed cost, average variable cost, average
> Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs: Calculate average fixed cost, average variable cost, and average total cost for each quantity. What is the efficient scale of the paintin
> Explain the benefits principle and the ability-to-pay principle. What are vertical equity and horizontal equity? Why is studying tax incidence important for determining the equity of a tax system?
> Draw a diagram of the long-run equilibrium in a monopolistically competitive market. How is price related to average total cost? How is price related to marginal cost?
> What is meant by the efficiency of a tax system? • What can make a tax system inefficient?
> What is the concept of horizontal equity and why is it hard to apply?
> Suppose you are a typical person in the U.S. economy. You pay 4 percent of your income in a state income tax and 15.3 percent of your labor earnings in federal payroll taxes (employer and employee shares combined). You also pay federal income taxes as in
> The chapter states that the elderly population in the United States is growing more rapidly than the total population. In particular, the number of workers is rising slowly, while the number of retirees is rising quickly. Concerned about the future of So
> The information in many of the tables in this chapter can be found in the Economic Report of the President, which appears annually. Using a recent issue of the report at your library or on the Internet, answer the following questions and provide some num
> Categorize each of the following funding schemes as examples of the benefits principle or the ability-to-pay principle. a. Visitors to many national parks pay an entrance fee. b. Local property taxes support elementary and secondary schools. c. An airpor
> Suppose that your state raises its sales tax from 5 percent to 6 percent. The state revenue commissioner forecasts a 20 percent increase in sales tax revenue. Is this plausible? Explain.
> When someone owns an asset (such as a share of stock) that rises in value, he has an “accrued” capital gain. If he sells the asset, he “realizes” the gains that have previously accrued. Under the U.S. income tax system, realized capital gains are taxed,
> Some states exclude necessities, such as food and clothing, from their sales tax. Other states do not. Discuss the merits of this exclusion. Consider both efficiency and equity.
> What is the free-rider problem? Why does the free-rider problem induce the government to provide public goods? How should the government decide whether to provide a public good?
> Among monopoly, oligopoly, monopolistic competition, and perfect competition, how would you classify the markets for each of the following drinks? a. tap water b. bottled water c. cola d. beer
> Classify the following markets as perfectly competitive, monopolistic, or monopolistically competitive, and explain your answers. a. wooden no. 2 pencils b. copper c. local electricity service d. peanut butter e. lipstick
> What determines how the burden of a tax is divided between buyers and sellers? Why?
> Explain why economists usually oppose controls on prices.
> Using supply-and-demand diagrams, show the effect of the following events on the market for sweatshirts. a. A hurricane in South Carolina damages the cotton crop. b. The price of leather jackets falls. c. All colleges require morning exercise in appropri
> At Fenway Park, home of the Boston Red Sox, seating is limited to 39,000. Hence, the number of tickets issued is fixed at that figure. Seeing a golden opportunity to raise revenue, the City of Boston levies a per ticket tax of $5 to be paid by the ticket
> A case study in this chapter discusses the federal minimum-wage law. a. Suppose the minimum wage is above the equilibrium wage in the market for unskilled labor. Using a supply-and-demand diagram of the market for unskilled labor, show the market wage, t
> Congress and the president decide that the United States should reduce air pollution by reducing its use of gasoline. They impose a $0.50 tax on each gallon of gasoline sold. a. Should they impose this tax on producers or consumers? Explain carefully usi
> If the government places a $500 tax on luxury cars, will the price paid by consumers rise by more than $500, less than $500, or exactly $500? Explain.
> A senator wants to raise tax revenue and make workers better off. A staff member proposes raising the payroll tax paid by firms and using part of the extra revenue to reduce the payroll tax paid by workers. Would this accomplish the senator’s goal? Expla
> Over the past 30 years, technological advances have reduced the cost of computer chips. How do you think this has affected the market for computers? For computer software? For typewriters?
> Define the price elasticity of demand. Explain the relationship between total revenue and the price elasticity of demand.
> Suppose the federal government requires beer drinkers to pay a $2 tax on each case of beer purchased. (In fact, both the federal and state governments impose beer taxes of some sort.) a. Draw a supply-and-demand diagram of the market for beer without the
> How might a drought that destroys half of all farm crops be good for farmers? If such a drought is good for farmers, why don’t farmers destroy their own crops in the absence of a drought?
> Define the price elasticity of supply. Explain why the price elasticity of supply might be different in the long run than in the short run.
> List and explain the four determinants of the price elasticity of demand discussed in the chapter.
> A storm destroys half the fava bean crop. Is this event more likely to hurt fava bean farmers if the demand for fava beans is very elastic or very inelastic? Explain.
> On a supply-and-demand diagram, show equilibrium price, equilibrium quantity, and the total revenue received by producers.
> If the elasticity is greater than 1, is demand elastic or inelastic? If the elasticity equals zero, is demand perfectly elastic or perfectly inelastic?
> Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run. a. If the price of heating oil rises from $1.80 to $2.20 per gallon, what happens to the quantity of heating oil demanded in the short run? In the lon
> Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston: a. As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacati
> For each of the following pairs of goods, which good would you expect to have more elastic demand and why? a. required textbooks or mystery novels b. Beethoven recordings or classical music recordings in general c. subway rides during the next six months
> Consider the markets for DVDs, TV screens, and tickets at movie theaters. a. For each pair, identify whether they are complements or substitutes: • DVDs and TV screens • DVDs and movie tickets • TV screens and movie tickets b. Suppose a technological adv
> A recent study found that the demand and supply schedules for Frisbees are as follows: a. What are the equilibrium price and quantity of Frisbees? b. Frisbee manufacturers persuade the government that Frisbee production improves scientistsâ€
> Explain why the following might be true: A drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in Kansas reduces the total revenue that Kansas farmers receive.
> You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. Should you increase or decrease the price of admission? Explain.
> Consider public policy aimed at smoking. a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should it incre
> Two drivers—Walt and Jessie—each drive up to a gas station. Before looking at the price, each places an order. Walt says, “I’d like 10 gallons of gas.” Jessie says, “I’d like $10 worth of gas.” What is each driver’s price elasticity of demand?
> The New York Times reported (Feb.17, 1996) that subway ridership declined after a fare increase: “There were nearly 4 million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous
> Maria has decided always to spend one-third of her income on clothing. a. What is her income elasticity of clothing demand? b. What is her price elasticity of clothing demand? c. If Maria’s tastes change and she decides to spend only one-fourth of her in
> Suppose that your demand schedule for DVDs is as follows: a. Use the midpoint method to calculate your price elasticity of demand as the price of DVDs increases from $8 to $10 if (i) your income is $10,000 and (ii) your income is $12,000. b. Calculate
> Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane destroys half the coffee bean crop. Use appropriately labeled diagrams to answer the following questions. a. What happens to the price of coffee beans? b. What happens to
> Make up an example of a monthly demand schedule for pizza and graph the implied demand curve. Give an example of something that would shift this demand curve, and briefly explain your reasoning. Would a change in the price of pizza shift this demand curv
> What is a market? • What are the characteristics of a perfectly competitive market?
> The government has decided that the free-market price of cheese is too low. a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and demand diagram to show the effect of this policy on the price of cheese and the qu
> Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price
> On the appropriate diagram, show what happens to the market for pizza if the price of tomatoes rises. On a separate diagram, show what happens to the market for pizza if the price of hamburgers falls.
> Make up an example of a monthly supply schedule for pizza, and graph the implied supply curve. Give an example of something that would shift this supply curve, and briefly explain your reasoning. Would a change in the price of pizza shift this supply cur
> Does a change in consumers’ tastes lead to a movement along the demand curve or a shift in the demand curve? Does a change in price lead to a movement along the demand curve or a shift in the demand curve? Explain your answers.
> What are the demand schedule and the demand curve, and how are they related? Why does the demand curve slope downward?
> What is a competitive market? Briefly describe a type of market that is not perfectly competitive.
> Describe the role of prices in market economies.
> Beer and pizza are complements because they are often enjoyed together. When the price of beer rises, what happens to the supply, demand, quantity supplied, quantity demanded, and price in the market for pizza?
> Define the equilibrium of a market. Describe the forces that move a market toward its equilibrium.
> What are the supply schedule and the supply curve, and how are they related? Why does the supply curve slope upward?
> Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket. As a result of this policy, do more or fewer people attend classical music concerts? Explain.
> Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows: a. Draw the demand and supply curves. What is unusual about this supply curve? Why might this be tru
> Because bagels and cream cheese are often eaten together, they are complements. a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern—a fall in the pric
> Consider the following events: Scientists reveal that eating oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees produce more oranges. Illustrate and explain what effect these changes have on
> The market for pizza has the following demand and supply schedules: a. Graph the demand and supply curves. What is the equilibrium price and quantity in this market? b. If the actual price in this market were above the equilibrium price, what would dri
> Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises, what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice?
> Explain each of the following statements using supply-and-demand diagrams. a. “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country.” b. “When the weather turns warm in New England every summer, the price
> In a supply-and-demand diagram, show how a tax on car buyers of $1,000 per car affects the quantity of cars sold and the price of cars. In another diagram, show how a tax on car sellers of $1,000 per car affects the quantity of cars sold and the price of
> Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which leads to a surplus? Why?
