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………………………… 500,000 40………………………… 600,000 30………………………… 700,000 20………………………… 800,000 10………………………… 900,000 0………………………… 1,000,000 The author is paid $2 million to write the book, and the marginal cost of publishing the book is a constant $10 per book. a. Compute total revenue, total cost, and profit at each quantity. What quantity would a profit maximizing publisher choose? What price would it charge? b. Compute marginal revenue. (Recall that MR = ΔTR/ΔQ.) How does marginal revenue compare to the price? Explain. c. Graph the marginal-revenue, marginal-cost, and demand curves. At what quantity do the marginal revenue and marginal-cost curves cross? What does this signify? d. In your graph, shade in the deadweight loss. Explain in words what this means. e. If the author were paid $3 million instead of $2 million to write the book, how would this affect the publisher’s decision regarding what price to charge? Explain. f. Suppose the publisher was not profit-maximizing but was concerned with maximizing economic efficiency. What price would it charge for the book? How much profit would it make at this price?
> 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.
> Name two types of market failure. Explain why each may cause market outcomes to be inefficient.
> 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. AÂ 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
> 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.........................................
> 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?
