A large share of the world supply of diamonds come from Russia and South Africa. Suppose that the marginal cost of mining diamonds is constant at $1,000 per diamond and the demand for diamonds is described by the following schedule: Price …………………………….Quantity $8,000 …………….5,000 diamonds 7,000 ……………………………….6,000 6,000 ……………………………….7,000 5,000………………………………. 8,000 4,000………………………………. 9,000 3,000 ……………………………….10,000 2,000 ……………………………….11,000 1,000 ……………………………….12,000 a. If there were many suppliers of diamonds, what would be the price and quantity? b. If there were only one supplier of diamonds, what would be the price and quantity? c. If Russia and South Africa formed a cartel, what would be the price and quantity? If the countries split the market evenly, what would be South Africa’s production and profit? What would happen to South Africa’s profit if it increased its production by $1,000 while Russia stuck to the cartel agreement? d. Use your answers to part (c) to explain why cartel agreements are often not successful.
> Describe the ultimatum game. What outcome from this game would conventional economic theory predict? Do experiments confirm this prediction? Explain.
> The government is considering two ways to help the needy: giving them cash or giving them free meals at soup kitchens. a. Give an argument, based on the standard theory of the rational consumer, for giving cash. b. Give an argument, based on asymmetric i
> State whether each of the following statements is true or false. Explain your answers. a. “All Giffen goods are inferior goods.” b. “All inferior goods are Giffen goods.”
> Define signaling and screening and give an example of each.
> Five roommates are planning to spend the weekend in their dorm room watching movies, and they are debating how many movies to watch. Here is their willingness to pay: Buying a DVD costs $15, which the roommates split equally, so each pays $3 per movie.
> Three friends are choosing a TV show to watch. Here are their preferences: a. If the three friends try using a Borda count to make their choice, what would happen? b. Monica suggests a vote by majority rule. She proposes that first they choose between
> Three friends are choosing a restaurant for dinner. Here are their preferences: a. If the three friends use a Borda count to make their decision, where do they go to eat? b. On their way to their chosen restaurant, they see that the Mexican and French
> What is moral hazard? List three things an employer might do to reduce the severity of this problem.
> Some AIDS activists believe that health insurance companies should not be allowed to ask applicant if they are infected with the HIV virus that causes AIDS. Would this rule help or hurt those who are HIV-positive? Would it help or hurt those who are not
> A case study in this chapter describes how a boyfriend can signal his love to a girlfriend by giving an appropriate gift. Do you think saying “I love you” can also serve as a signal? Why or why not?
> Suppose that the Live-Long-and-Prosper Health Insurance Company charges $5,000 annually for a family insurance policy. The company’s president suggests that the company raise the annual price to $6,000 to increase its profits. If the firm followed this s
> Each of the following situations involves moral hazard. In each case, identify the principal and the agent and explain why there is asymmetric information. How does the action described reduce the problem of moral hazard? a. Landlords require tenants to
> When recording devices were first invented more than 100 years ago, musicians could suddenly supply their music to large audiences at low cost. How do you suppose this development affected the income of the best musicians? How do you suppose it affected
> Jim buys only milk and cookies. a. In year 1, Jim earns $100, milk costs $2 per quart, and cookies cost $4 per dozen. Draw Jim’s budget constraint. b. Now suppose that all prices increase by 10 percent in year 2 and that Jim’s salary increases by 10 perc
> This chapter discusses the importance of economic mobility. a. What policies might the government pursue to increase economic mobility within a generation? b. What policies might the government pursue to increase economic mobility across generations? c.
> What does the poverty rate measure? Describe three potential problems in interpreting the measured poverty rate.
> List three policies aimed at helping the poor, and discuss the pros and cons of each.
> Table 3 shows that the percentage of children in families with income below the poverty line far exceeds the percentage of the elderly in such families. How might the allocation of government money across different social programs have contributed to thi
> The nation of Ectenia has twenty competitive apple orchards, which sell apples at the world price of $2 per apple. The following equations describe the production function and the marginal product of labor in each orchard: Q = 100L − L2 MPL = 100 − 2L
> Define compensating differential and give an example.Give two reasons why more educated workers earn more than less educated workers.
> What conditions lead to highly compensated superstars? Would you expect to see superstars in dentistry? In music? Explain.
> Give three reasons a worker’s wage might be above the level that balances supply and demand.
> Pam earns more than Pauline. Someone proposes taxing Pam to supplement Pauline’s income. How would a utilitarian, a liberal, and a libertarian each evaluate this proposal?
> This chapter discusses companies that are oligopolists in the market for the goods they sell. Many of the same ideas apply to companies that are oligopolists in the market for the inputs they buy. a. If sellers who are oligopolists try to increase the pr
> Consider trade relations between the United States and Mexico. Assume that the leaders of the two countries believe the payoffs to alternative trade policies are as follows: a. What is the dominant strategy for the United States? For Mexico? Explain. b
> A basic finding of labor economics is that workers who have more experience in the labor force are paid more than workers who have less experience (holding constant the amount of formal education). Why might this be so? Some studies have also found that
> A minimum-wage law distorts the market for low-wage labor. To reduce this distortion, some economists advocate a two-tiered minimum-wage system, with a regular minimum wage for adult workers and a lower, “subminimum” wage for teenage workers. Give two r
> Consider two of the income security programs in the United States: TANF and the EITC. a. When a woman with children and very low income earns an extra dollar, she receives less in TANF benefits. What do you think is the effect of this feature of TANF on
> At some colleges and universities, economics professors receive higher salaries than professors in some other fields. a. Why might this be true? b. Some other colleges and universities have a policy of paying equal salaries to professors in all fields. A
> Define marginal product of labor and value of the marginal product of labor.Describe how a competitive, profit-maximizing firm decides how many workers to hire.
> What determines the income of the owners of land and capital?How would an increase in the quantity of capital affect the incomes of those who already own capital? How would it affect the incomes of workers?
> How does an immigration of workers affect labor supply, labor demand, the marginal product of labor, and the equilibrium wage?
> Explain how the wage can adjust to balance the supply and demand for labor while simultaneously equaling the value of the marginal product of labor.
> Give two examples of events that could shift the supply of labor, and explain why they do so.
> Synergy and Dynaco are the only two firms in a specific high-tech industry. They face the following payoff matrix as they decide upon the size of their research budget: a. Does Synergy have a dominant strategy? Explain. b. Does Dynaco have a dominant s
> Your enterprising uncle opens a sandwich shop that employs seven people. The employees are paid $6 per hour, and a sandwich sells for $3. If your uncle is maximizing his profit, what is the value of the marginal product of the last worker he hired? What
> College students sometimes work as summer interns for private firms or the government. Many of these positions pay little or nothing. a. What is the opportunity cost of taking such a job? b. Explain why students are willing to take these jobs. c. If you
> Give two examples of events that could shift the demand for labor, and explain why they do so.
> Explain how a firm’s production function is related to its marginal product of labor, how a firm’s marginal product of labor is related to the value of its marginal product, and how a firm’s value of marginal product is related to its demand for labor.
> Smiling Cow Dairy can sell all the milk it wants for $4 a gallon, and it can rent all the robots it wants to milk the cows at a capital rental price of $100 a day. It faces the following production schedule: Number ofRobots …………….……………………Total Product 0
> The poverty rate would be substantially lower if the market value of in-kind transfers were added to family income. The largest in-kind transfer isMedicaid, the government health program for the poor. Let’s say the program costs $10,000 per recipient fam
> Tell the story of the prisoners’ dilemma. Write down a table showing the prisoners’ choices and explain what outcome is likely. • What does the prisoners’ dilemma teach us about oligopolies?
> Suppose that labor is the only input used by a perfectly competitive firm. The firm’s production function is as follows: Days of Labor ………………………………….Units of Output0 days 0 units 1 …………………………….…………………….…………….………….7 2 ……………………………….………………….……………….……….13 3
> The New York Times (Nov. 30, 1993) reported that “the inability of OPEC to agree last week to cut production has sent the oil market into turmoil . . . [leading to] the lowest price for domestic crude oil since June 1990.” a. Why were the members of OPEC
> If the members of an oligopoly could agree on a total quantity to produce, what quantity would they choose?If the oligopolists do not act together but instead make production decisions individually, do they produce a total quantity more or less than in y
> Give two examples other than oligopoly that show how the prisoners’ dilemma helps to explain behavior.
> Explain the costs and benefits of reducing inflation to zero. Which are temporary and which are permanent?
> What are the pros and cons of in-kind (rather than cash) transfers to the poor?
> What is the prisoners’ dilemma, and what does it have to do with oligopoly?
> This chapter considers the economics of discrimination by employers, customers, and governments. Now consider discrimination by workers. Suppose that some brunette workers do not like working with blonde workers. Can this worker discrimination explain lo
> Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company’s profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price: a. Does either playe
> Two athletes of equal ability are competing for a prize of $10,000. Each is deciding whether to take a dangerous performance-enhancing drug. If one athlete takes the drug, and the other does not, the one who takes the drug wins the prize. If both or neit
> Suppose there are two possible income distributions in a society of ten people. In the first distribution, nine people have incomes of $30,000 and one person has an income of $10,000. In the second distribution, all ten people have incomes of $25,000. a.
> Show the effect of each of the following events on the market for labor in the computer manufacturing industry. a. Congress buys personal computers for all U.S. college students. b. More college students major in engineering and computer science. c. Comp
> Draw some indifference curves for pizza and Pepsi. Explain the four properties of these indifference curves.
> Draw the budget constraint for a person with income of $1,000 if the price of Pepsi is $5 and the price of pizza is $10. What is the slope of this budget constraint?
> Explain how an increase in the wage can potentially decrease the amount that a person wants to work.
> Leadbelly Co. sells pencils in a perfectly competitive product market and hires workers in a perfectly competitive labor market. Assume that the market wage rate for workers is $150 per day. a. What rule should Leadbelly follow to hire the profit-maximiz
> Draw a budget constraint and indifference curves for pizza and Pepsi. Show what happens to the budget constraint and the consumer’s optimum when the price of pizza rises. In your diagram, decompose the change into an income effect and a substitution effe
> Pick a point on an indifference curve for wine and cheese and show the marginal rate of substitution. What does the marginal rate of substitution tell us?
> Draw a consumer’s indifference curves for wine and cheese. Describe and explain four properties of these indifference curves.
> A case study in the chapter describes a phone conversation between the presidents of American Airlines and Braniff Airways. Let’s analyze the game between the two companies. Suppose that each company can charge either a high price for tickets or a low pr
> When Alan Greenspan (who would later become chairman of the Federal Reserve) ran an economic consulting firm in the 1960s, he primarily hired female economists. He once told the New York Times, “I always valued men and women equally, and I found that bec
> A consumer has income of $3,000. Wine costs $3 per glass, and cheese costs $6 per pound. Draw the consumer’s budget constraint with wine on the vertical axis. What is the slope of this budget constraint?
> This chapter uses the analogy of a “leaky bucket” to explain one constraint on the redistribution of income. a. What elements of the U.S. system for redistributing income create the leaks in the bucket? Be specific. b. Do you think that Republicans or De
> Can an increase in the price of cheese possibly induce a consumer to buy more cheese? Explain.
> According to traditional Keynesian analysis, why does a tax cut have a smaller effect on GDP than a similarly sized increase in government spending? Why might the opposite be the case?
> What causes the lags in the effect of monetary and fiscal policy on aggregate demand? What are the implications of these lags for the debate over active versus passive policy?
> What are two situations in which most economists view a budget deficit as justifiable?
> Explain two ways in which a government budget deficit hurts a future worker.
> Explain how credibility might affect the cost of reducing inflation.
> What might motivate a central banker to cause a political business cycle? What does the political business cycle imply for the debate over policy rules?
> Policymakers who want to stabilize the economy must decide how much to change the money supply, government spending, or taxes. Why is it difficult for policymakers to choose the appropriate strength of their actions?
> The chapter suggests that the economy, like the human body, has “natural restorative powers.” a. Illustrate the short-run effect of a fall in aggregate demand using an aggregate-demand/aggregatesupply diagram. What happens to total output, income, and em
> What is the fundamental trade-off that society faces if it chooses to save more? How might the government increase national saving?
> The price of cheese rises from $6 to $10 per pound, while the price of wine remains $3 per glass. For a consumer with a constant income of $3,000, show what happens to consumption of wine and cheese. Decompose the change into income and substitution effe
> Explain how each of the following policies redistributes income across generations. Is the redistribution from young to old or from old to young? a. an increase in the budget deficit b. more generous subsidies for education loans c. greater investments i
> Suppose the federal government cuts taxes and increases spending, raising the budget deficit to 12 percent of GDP. If nominal GDP is rising 5 percent per year, are such budget deficits sustainable forever? Explain. If budget deficits of this size are mai
> Why are the benefits of reducing inflation permanent and the costs temporary? Why are the costs of increasing inflation permanent and the benefits temporary? Use Phillips-curve diagrams in your answer.
> The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories. a. If investors believed that capital taxes would rema
> Draw the Phillips curve. Use the model of aggregate demand and aggregate supply to show how policy can move the economy from a point on this curve with high inflation to a point with low inflation.
> What is the sacrifice ratio? How might the credibility of the Fed’s commitment to reduce inflation affect the sacrifice ratio?
> Give an example of a favorable shock to aggregate supply. Use the model of aggregate demand and aggregate supply to explain the effects of such a shock. How does it affect the Phillips curve?
> Draw the short-run Phillips curve and the long-run Phillips curve. Explain why they are different.
> Draw the long-run trade-off between inflation and unemployment. Explain how the short-run and long-run trade-offs are related.
> Draw the short-run trade-off between inflation and unemployment. How might the Fed move the economy from one point on this curve to another?
> Policymakers sometimes propose laws requiring firms to give workers certain fringe benefits, such as health insurance or paid parental leave. Let’s consider the effects of such a policy on the labor market. a. Suppose that a law required firms to give ea
> The Fed decides to reduce inflation. Use the Phillips curve to show the short-run and long-run effects of this policy. How might the short-run costs be reduced?
> Suppose a drought destroys farm crops and drives up the price of food. What is the effect on the short-run trade-off between inflation and unemployment?
> What is “natural” about the natural rate of unemployment? Why might the natural rate of unemployment differ across countries?
> Illustrate the effects of the following developments on both the short-run and long-run Phillips curves. Give the economic reasoning underlying your answers. a. a rise in the natural rate of unemployment b. a decline in the price of imported oil c. a ris
> Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that describe the four situations listed here. Label the point that shows the position of the economy in each case. a. Actual inflation is 5 percent, and expect
> As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease inshort-run aggregate supply caused by rising commodity prices. a. Starting from a long-run equilibriu
> Suppose the Federal Reserve announced that it would pursue contractionary monetary policy to reduce the inflation rate. Would the following conditions make the ensuing recession more or less severe? Explain. a. Wage contracts have short durations. b. The
> Suppose the Federal Reserve’s policy is to maintain low and stable inflation by keeping unemployment at its natural rate. However, the Fed believes that the natural rate of unemployment is 4 percent when the actual natural rate is 5 percent. If the Fed b
> The inflation rate is 10 percent, and the central bank is considering slowing the rate of money growth to reduce inflation to 5 percent. Economist Milton believes that expectations of inflation change quickly in response to new policies, whereas economis
> Suppose the economy is in a long-run equilibrium. a. Draw the economy’s short-run and long-run Phillips curves. b. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a). If the Fed unde
> How would a utilitarian, a liberal, and a libertarian each determine how much income inequality is permissible?
> Suppose that a fall in consumer spending causes a recession. a. Illustrate the immediate change in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram. On both graphs, label the initial long-run equilibrium as
> Use the theory of liquidity preference to explain how a decrease in the money supply affects the equilibrium interest rate. How does this change in monetary policy affect the aggregate-demand curve?
