Suppose you have invested in a new computer company whose profitability depends on two factors: (1) whether the U.S. Congress passes a tariff raising the cost of Japanese computers and (2)whether the U.S. economy grows slowly or quickly.What are the four mutually exclusive states of the world that you should be concerned about?
> The domestic supply and demand curves for hula beans are as follows: Supply:P = 50 + Q Demand:P = 200 – 2Q where P is the price in cents per pound and Q is the quantity in millions of pounds.The U.S. is a small producer in the world hula bean market, whe
> What are the four basic assumptions about individual preferences?Explain the significance or meaning of each.
> A vegetable fiber is traded in a competitive world market, and the world price is $9 per pound.Unlimited quantities are available for import into the United States at this price.The U.S. domestic supply and demand for various price levels are shown as fo
> Suppose a firm must pay an annual tax, which is a fixed sum, independent of whether it produces any output. a.How does this tax affect the firm’s fixed, marginal, and average costs? b. Now suppose the firm is charged a tax that is proportional to the num
> You are an employer seeking to fill a vacant position on an assembly line.Are you more concerned with the average product of labor or the marginal product of labor for the last person hired?If you observe that your average product is just beginning to de
> a. Suppose that a firm’s production function is q= 9x1/2 in the short run, where there are fixed costs of $1000, and x is the variable input whose cost is $4000 per unit.What is the total cost of producing a level of output q?In other words, identify the
> Example 9.5 describes the effects of the sugar quota.In 2005, imports were limited to 5.3 billion pounds, which pushed the domestic price to 27 cents per pound.Suppose imports were expanded to 10 billion pounds. a.What would be the new U.S. domestic pri
> When is it worth paying to obtain more information to reduce uncertainty?
> Why do long-run elasticities of demand differ from short-run elasticities? Consider two goods: paper towels and televisions.Which is a durable good?Would you expect the price elasticity of demand for paper towels to be larger in the short run or in the l
> In Example 9.1, we calculated the gains and losses from price controls on natural gas and found that there was a deadweight loss of $5.68 billion.This calculation was based on a price of oil of $50 per barrel. a.If the price of oil were $60 per barrel, w
> Among the tax proposals regularly considered by Congress is an additional tax on distilled liquors.The tax would not apply to beer.The price elasticity of supply of liquor is 4.0, and the price elasticity of demand is –0.2.The cross-elasticity of demand
> A political campaign manager must decide whether to emphasize television advertisements or letters to potential voters in a reelection campaign.Describe the production function for campaign votes.How might information about this function (such as the sha
> A moderately risk-averse investor has 50 percent of her portfolio invested in stocks and 50 percent in risk-free Treasury bills.Show how each of the following events will affect the investor’s budget line and the proportion of stocks in her portfolio: a
> A particular metal is traded in a highly competitive world market at a world price of $9 per ounce.Unlimited quantities are available for import into the United States at this price.The supply of this metal from domestic U.S. mines and mills can be repre
> The United States currently imports all of its coffee.The annual demand for coffee by U.S. consumers is given by the demand curve Q = 250 – 10P, where Q is quantity (in millions of pounds) and P is the market price per pound of coffee. World producers ca
> Why do people often want to insure fully against uncertain situations even when the premium paid exceeds the expected value of the loss being insured against?
> For each of the following examples, draw a representative isoquant.What can you say about the marginal rate of technical substitution in each case? a.A firm can hire only full-time employees to produce its output, or it can hire some combination of full
> Explain why the Paasche index will generally understate the ideal cost-of-living index.
> Example 2.9 (page 54) analyzes the world oil market.Using the data given in that example: a.Show that the short-run demand and competitive supply curves are indeed given by D = 35.5 – 0.03P SC = 18 + 0.04P. b.Show that the long-run demand and competiti
> Draw a budget line and then draw an indifference curve to illustrate the satisfaction maximizing choice associated with two products.Use your graph to answer the following questions. a.Suppose that one of the products is rationed.Explain why the consume
> Suppose that unusually hot weather causes the demand curve for ice cream to shift to the right.Why will the price of ice cream rise to a new market-clearing level?
> Suppose that you are the consultant to an agricultural cooperative that is deciding whether members should cut their production of cotton in half next year.The cooperative wants your advice as to whether this action will increase members’ revenues.Knowin
> A firm has a fixed production costs of $5,000 and a constant marginal cost of production of equal to $500 per unit produced. a. What is the firm’s total cost function?Average cost? b. If the firm wanted to minimize the average total cost, would it choose
> Suppose a chair manufacturer is producing in the short run (with its existing plant and equipment).The manufacturer has observed the following levels of production corresponding to different numbers of workers: Number of chairs………......Number of workers
> Decide whether each of the following statements is true or false and explain why: a.Fast-food chains like McDonald’s, Burger King, and Wendy’s operate all over the United States.Therefore the market for fast food is a national market. b. People generall
> Suppose that a competitive firm’s marginal cost of producing output q is given by MC(q) = 3 + 2q.Assume that the market price of the firm’s product is $9. a.What level of output will the firm produce? b. What is the firm’s producer surplus? c. Suppose t
> Suppose you are the manager of a watchmaking firm operating in a competitive market.Your cost of production is given by C = 200 + 2q2, where q is the level of output and C is total cost.(The marginal cost of production is 4q; the fixed cost is $200.) a.I
> Suppose a competitive industry faces an increase in demand (i.e., the demand curve shifts upward).What are the steps by which a competitive market insures increased output?Will your answer change if the government imposes a price ceiling?
> An individual consumes two goods, clothing and food.Given the information below, illustrate both the income-consumption curve and the Engel curve for clothing and food. Quantity Quantity Income Clothing 6 Price Price Clothing Food Food $10 $100 $150
> Use the same information as in Exercise 1. a.Derive the firm’s short-run supply curve. b.If 100 identical firms are in the market, what is the industry supply curve? Information from Exercise 1 R MC MR R MR P= 60 C P= 60 P= 60 P= 6
> Using the data in the table, show what happens to the firm’s output choice and profit if the fixed cost of production increases from $100 to $150 and then to $200.Assume that the price of the output remains at $60 per unit.What general
> The data in the table give information about the price (in dollars) for which a firm can sell a unit of output and the total cost of production. a.Fill in the blanks in the table. b.Show what happens to the firm’s output choice and pr
> If the firm’s average cost curves are U-shaped, why does its average variable cost curve achieve its minimum at a lower level of output than the average total cost curve?
> The price of computers has fallen substantially over the past two decades.Use this drop in price to explain why the Consumer Price Index is likely to overstate substantially the cost-of-living index for individuals who use computers intensively.
> The director of a theater company in a small college town is considering changing the way he prices tickets.He has hired an economic consulting firm to estimate the demand for tickets.The firm has classified people who go the theater into two groups, and
> In 1998, Americans smoked 470 billion cigarettes, or 23.5 billion packs of cigarettes.The average retail price was $2 per pack.Statistical studies have shown that the price elasticity of demand is –0.4, and the price elasticity of supply is 0.5.Using thi
> Suppose that two investments have the same three payoffs, but the probability associated with each payoff differs, as illustrated in the table below: a. Find the expected return and standard deviation of each investment. b. Jill has the utility function
> A sales tax of 10 percent is placed on half the firms (the polluters) in a competitive industry.The revenue is paid to the remaining firms (the nonpolluters) as a 10 percent subsidy on the value of output sold. a.Assuming that all firms have identical c
> A sales tax of $1 per unit of output is placed on a particular firm whose product sells for $5 in a competitive industry with many firms. a.How will this tax affect the cost curves for the firm? b. What will happen to the firm’s price, output, and profi
> How are production limits used in practice to raise the prices of the following goods or services: (a) taxi rides, (b) drinks in a restaurant or bar, (c) wheat or corn?
> Connie has a monthly income of $200 that she allocates among two goods: meat and potatoes. a.Suppose meat costs $4 per pound and potatoes $2 per pound.Draw her budget constraint. b.Suppose also that her utility function is given by the equation U(M, P) =
> Suppose the process of producing lightweight parkas by Polly’s Parkas is described by the function q = 10K.8(L – 40).2 where q is the number of parkas produced, K the number of computerized stitchingmachine hours, and L the number of person-hours of labo
> In Exercise 4 in Chapter 2 we examined a vegetable fiber traded in a competitive world market and imported into the United States at a world price of $9 per pound. U.S. domestic supply and demand for various price levels are shown in the following table.
> Consider a city that has a number of hot dogs stands operating throughout the downtown area.Suppose that each vendor has a marginal cost of $1.50 per hot dog sold and no fixed cost.Suppose the maximum number of hot dogs that any one vendor can sell is 10
> Vera has decided to upgrade the operating system on her new PC.She hears that the new Linux operating system is technologically superior to Windows and substantially lower in price.However, when she asks her friends, it turns out they all use PCs with Wi
> A number of stores offer film developing as a service to their customers.Suppose that each store offering this service has a cost function C(q)=50+0.5q+0.08q2 and a marginal cost MC=0.5+0.16q. a.If the going rate for developing a roll of film is $8.50,
> Refer to Example 2.5 (below) on the market for wheat.In 1998, the total demand for U.S. wheat was Q = 3244 – 283P and the domestic supply was QS = 1944 + 207P.At the end of 1998, both Brazil and Indonesia opened their wheat markets to U
> Suppose the demand for natural gas is perfectly inelastic.What would be the effect, if any, of natural gas price controls?
> The following table shows the average retail price of butter and the Consumer Price Index from 1980 to 2000, scaled so that the CPI = 100 in 1980 a.Calculate the real price of butter in 1980 dollars.Has the real price increased/decreased/stayed the same
> Julio receives utility from consuming food (F) and clothing (C) as given by the utility function U(C,F) = FC.In addition, the price of food is $2 per unit, the price of clothing is $10 per unit, and Julio’s weekly income is $50. a.What is Julio’s margin
> Explain whether the following statements are true or false. a.The marginal rate of substitution diminishes as an individual moves downward along the demand curve. b.The level of utility increases as an individual moves downward along the demand curve. c
> Describe the equal marginal principle.Explain why this principle may not hold if increasing marginal utility is associated with the consumption of one or both goods.
> Suppose that a competitive firm has a total cost function C(q)= 450+15q+2q2 and a marginal cost function MC(q)=15+4q.If the market price is P = $115 per unit, find the level of output produced by the firm.Find the level of profit and the level of produce
> A city is considering how much to spend to hire people to monitor its parking meters.The following information is available to the city manager: • Hiring each meter monitor costs $10,000 per year. • With one monitoring person hired, the probability of
> Why do firms enter an industry when they know that in the long run economic profit will be zero?
> A computer company produces hardware and software using the same plant and labor. The total cost of producing computer processing units H and software programs S is given by TC = aH + bS !cHS where a, b, and c are positive.Is this total cost function con
> Brenda wants to buy a new car and has a budget of $25,000.She has just found a magazine that assigns each car an index for styling and an index for gas mileage.Each index runs from 1-10, with 10 representing either the most styling or the best gas mileag
> Suppose you are given the following information about a particular industry: Assume that all firms are identical, and that the market is characterized by pure competition. a.Find the equilibrium price, the equilibrium quantity, the output supplied by th
> Suppose the long-run total cost function for an industry is given by the cubic equation TC = a + bq + cq2 + dq3.Show (using calculus) that this total cost function is consistent with a U-shaped average cost curve for at least some values of a, b, c, and
> The city council of a small college town decides to regulate rents in order to reduce student living expenses.Suppose the average annual market-clearing rent for a twobedroom apartment had been $700 per month, and rents were expected to increase to $900
> Can there be constant returns to scale in an industry with an upward-sloping supply curve?Explain.
> Suppose that rather than the declining demand assumed in Example 2.8, a decrease in the cost of copper production causes the supply curve to shift to the right by 40 percent.How will the price of copper change?
> In Example 2.8 below we examined the effect of a 20-percent decline in copper demand on the price of copper, using the linear supply and demand curves developed in Section 2.6. Suppose the long-run price elasticity of copper demand were â€
> True or false:A firm should always produce at an output at which long-run average cost is minimized.Explain.
> Why does production eventually experience diminishing marginal returns to labor in the short run?
> A computer company’s cost function, which relates its average cost of production AC to its cumulative output in thousands of computers Q and its plant size in terms of thousands of computers produced per year q (within the production range of 10,000 to 5
> Based on his preferences, Bill is willing to trade 4 movie tickets for 1 ticket to a basketball game.If movie tickets cost $8 each and a ticket to the basketball game costs $40, should Bill make the trade?Why or why not?
> Suppose that a firm’s production function is q=10L1/2K1/2 .The cost of a unit of labor is $20 and the cost of a unit of capital is $80. a.The firm is currently producing 100 units of output and has determined that the cost-minimizing optimal quantities
> Suppose a production function is given by F(K, L) = KL2; the price of capital is $10 and the price of labor $15.What combination of labor and capital minimizes the cost of producing any given output?
> A chair manufacturer hires its assembly-line labor for $30 an hour and calculates that the rental cost of its machinery is $15 per hour.Suppose that a chair can be produced using 4 hours of labor or machinery in any combination.If the firm is currently u
> The short-run cost function of a company is given by the equation TC = 200 + 55q, where TC is the total cost and q is the total quantity of output, both measured in thousands. a.What is the company’s fixed cost? b.If the company produced 100,000 units o
> Suppose the government regulates the price of a good to be no lower than some minimum level.Can such a minimum price make producers as a whole worse off?Explain.
> Ben allocates his lunch budget between two goods, pizza and burritos. a.Illustrate Ben’s optimal bundle on a graph with pizza on the horizontal axis. b.Suppose now that pizza is taxed, causing the price to increase by 20 percent. Illustrate Ben’s new
> You manage a plant that mass-produces engines by teams of workers using assembly machines.The technology is summarized by the production function q = 5 KL where q is the number of engines per week, K is the number of assembly machines, and L is the numb
> The utility that Meredith receives by consuming food F and clothing C is given by U(F,C) = FC.Suppose that Meredith’s income in 1990 is $1200 and that the prices of food and clothing are $1 per unit for each.By 2000, however, the price of food has increa
> Suppose the income elasticity of demand for food is 0.5 and the price elasticity of demand is –1.0.Suppose also that Felicia spends $10,000 a year on food, the price of food is $2, and that her income is $25,000. a.If a sales tax on food caused the pric
> Give an example of a production process in which the short run involves a day or a week and the long run any period longer than a week.
> Can a firm have a production function that exhibits increasing returns to scale, constant returns to scale, and decreasing returns to scale as output increases?Discuss.
> It is possible to have diminishing returns to a single factor of production and constant returns to scale at the same time.Discuss.
> In long-run equilibrium, all firms in the industry earn zero economic profit.Why is this true?
> Tickets to a rock concert sell for $10.But at that price, the demand is substantially greater than the available number of tickets.Is the value or marginal benefit of an additional ticket greater than, less than, or equal to $10?How might you determine t
> Assume that the marginal cost of production is increasing.Can you determine whether the average variable cost is increasing or decreasing?Explain.
> Japanese rice producers have extremely high production costs, due in part to the high opportunity cost of land and to their inability to take advantage of economies of large-scale production.Analyze two policies intended to maintain Japanese rice product
> As the owner of a family farm whose wealth is $250,000, you must choose between sitting this season out and investing last year’s earnings ($200,000) in a safe money market fund paying 5.0 percent or planting summer corn.Planting costs $200,000, with a s
> Why is the marginal product of labor likely to increase initially in the short run as more of the variable input is hired?
> The cost of flying a passenger plane from point A to point B is $50,000.The airline flies this route four times per day at 7 AM, 10 AM, 1 PM, and 4 PM.The first and last flights are fulfilled l to capacity with 240 people.The second and third flights are
> Consider a lottery with three possible outcomes: • $125 will be received with probability .2 • $100 will be received with probability .3 • $50 will be received with probability .5 a.What is the expected value of the lottery? b. What is the variance of
> Suppose the demand curve for a product is given by Q = 10 − 2P + PS, where P is the price of the product and PS is the price of a substitute good.The price of the substitute good is $2.00. a.Suppose P = $1.00.What is the price elasticity of demand?What
> Explain why the marginal rate of technical substitution is likely to diminish as more and more labor is substituted for capital.
> Consumers in Georgia pay twice as much for avocados as they do for peaches.However, avocados and peaches are the same price in California.If consumers in both states maximize utility, will the marginal rate of substitution of peaches for avocados be the
> Much of the demand for U.S. agricultural output has come from other countries.In 1998, the total demand for wheat was Q = 3244 – 283P.Of this, total domestic demand was QD = 1700 – 107P, and domestic supply was QS = 1944 + 207P.Suppose the export demand
> Explain the term “marginal rate of technical substitution.”What does a MRTS = 4 mean?
> Suppose the same firm’s cost function is C(q) = 4q2 + 16. a.Find variable cost, fixed cost, average cost, average variable cost, and average fixed cost. b.Show the average cost, marginal cost, and average variable cost curves on a graph. c. Find the outp
> Suppose the market for widgets can be described by the following equations: Demand:P = 10 – Q Supply:P = Q – 4 where P is the price in dollars per unit and Q is the quantity in thousands of units.Then: a. What is the equilibrium price and quantity? b.Su
> In Example 6.3, wheat is produced according to the production function q = 100(K0.8L0.2). a.Beginning with a capital input of 4 and a labor input of 49, show that the marginal product of labor and the marginal product of capital are both decreasing. b.
> The production function for the personal computers of DISK, Inc., is given by q = 10K0.5L0.5, where q is the number of computers produced per day, K is hours of machine time, and L is hours of labor input.DISK’s competitor, FLOPPY, Inc., is using the pro
> The ACME Corporation determines that at current prices the demand for its computer chips has a price elasticity of –2 in the short run, while the price elasticity for its disk drives is –1. a.If the corporation decides to raise the price of both product
> Do the following functions exhibit increasing, constant, or decreasing returns to scale?What happens to the marginal product of each individual factor as that factor is increased and the other factor held constant?
> The marginal product of labor in the production of computer chips is 50 chips per hour.The marginal rate of technical substitution of hours of labor for hours of machine capital is 1/4.What is the marginal product of capital?
> Distinguish between economies of scale and economies of scope.Why can one be present without the other?
