Dane decides to give up a job earning $200,000 per year as a corporate lawyer and converts the duplex that he owns into a UFO museum. (He had been renting out the duplex for $20,000 a year.) His explict costs are $75,000 per year paid to his assistants and $10,000 per year for utilities. Fans flock to the museum to see his collection of extraterrestrial paraphernalia, which he could easily sell on eBay for $1,000,000. Over the course of the year, the museum brings in revenues of $200,000. a. How much is Dane’s accounting profit for the year? b. Is Dane earning an economic profit? Explain.
> For Jill Johnson’s pizza restaurant, explain whether each of the following is a fixed cost or a variable cost: a. The payment she makes on her fire insurance policy b. The payment she makes to buy pizza dough c. The wages she pays her workers d. The leas
> Explain why market power leads to a deadweight loss. Is the total deadweight loss from market power for the economy large or small?
> Suppose that a perfectly competitive industry becomes a monopoly. Describe the effects of this change on consumer surplus, producer surplus, and deadweight loss.
> Will a monopoly that maximizes profit also be maximizing revenue? Will it be maximizing output? Briefly explain.
> When homebuilders construct a new housing development, they usually sell to a single cable television company the rights to lay cable. As a result, anyone buying a home in that development is not able to choose between competing cable companies. Some cit
> A student argues: “If a monopolist finds a way of producing a good at lower cost, he will not lower his price. Because he is a monopolist, he will keep the price and the quantity the same and just increase his profit.” Do you agree? Use a graph to illust
> Harvard Business School started using case studies— descriptions of strategic problems encountered at real companies—in courses in 1912. Today, Harvard Business Publishing (HBP) sells its case studies to about 4,000 colleges worldwide. HBP is the sole pu
> Briefly explain whether you agree with the following statement: “International trade is more important to the U.S. economy than it is to most other economies.”
> In most universities, economics professors receive larger salaries than English professors. Suppose that the government requires that from now on, all universities must pay economics professors the same salaries as English professors. Use demand and supp
> Does a monopolist have a supply curve? Briefly explain. (Hint: Look again at the definition of a supply curve in Chapter 3 on page 83 and consider whether this definition applies to a monopolist.)
> Before inexpensive pocket calculators were developed, many science and engineering students used slide rules to make numerical calculations. Slide rules are no longer produced, which means nothing prevents you from establishing a monopoly in the slide ru
> Use the information in Solved Problem 15.3 to answer the following questions. a. What will Comcast do if the tax is $36.00 per month instead of $25.00? (Hint: Will its decision be different in the long run than in the short run?) b. Suppose that the flat
> What is the lemons problem? Is there a lemons problem in the market for health insurance? Briefly explain.
> Ed Scahill has acquired a monopoly on the production of baseballs (don’t ask how) and faces the demand and cost situation shown in the following table. a. Fill in the remaining values in the table. b. If Ed wants to maximize profit, w
> Draw a graph that shows a monopolist earning a profit. Be sure your graph includes the monopolist’s demand, marginal revenue, average total cost, and marginal cost curves. Be sure to indicate the profit-maximizing level of output and price.
> Marty and Ann discussed the rule of equal marginal utility per dollar spent, a topic that was recently covered in the economics course they were both taking: Marty: “When I use my calculator to divide the marginal utility of pizza by a price of zero, I d
> In what sense is a monopolist a price maker? Will charging the highest possible price always maximize a monopolist’s profit? Briefly explain.
> In a column in the Wall Street Journal, venture capitalist Peter Thiel described the difference between monopoly businesses and competitive ones: “Suppose you want to start a restaurant in Palo Alto that serves British food. ‘No one else is doing it,’ yo
> What is the relationship between a monopolist’s demand curve and the market demand curve? What is the relationship between a monopolist’s demand curve and its marginal revenue curve?
> As noted in this chapter, many generic versions of the diabetes drug Glucophage were introduced within the first year of Glucophage’s patent expiration. The U.S. Supreme Court has ruled that patients who become ill taking generic drugs cannot sue the man
> Use the following graphs to answer the questions. a. What is the equilibrium quantity of trash collectors hired, and what is the equilibrium wage? b. What is the equilibrium quantity of receptionists hired, and what is the equilibrium wage? c. Briefly
> Why is limited liability more important for firms trying to raise funds from a large number of investors than for firms trying to raise funds from a small number of investors?
> Suppose that the quantity demanded per day for a product is 90 when the price is $35. The following table shows costs for a firm with a monopoly in this market: Briefly explain whether this firm has a natural monopoly. Quantity (per day) Total Cost
> In China, the government owns many more firms than in the United States. A former Chinese government official argued that a number of government-run industries such as oil refining were natural monopolies. Is it likely that oil refining is a natural mono
> In a magazine article, a writer explained that the provision of electric power in the United States consists of two processes: the generation of electricity and the distribution of electricity. The writer argued that “power distribution is a natural mono
> Why was De Beers worried that people might resell their old diamonds? How did De Beers attempt to convince consumers that previously owned diamonds were not good substitutes for new diamonds? How did De Beers’s strategy affect the demand curve for new di
> Coca-Cola has been focusing on selling more 7.5-ounce cans in displays near supermarket checkout lines. Previously, Coke had relied more heavily on 20-ounce bottles displayed in the beverage sections of supermarkets. An article in the Wall Street Journal
> In a letter to his company’s stockholders, Warren Buffett offered the following opinion: “Most investors, of course, have not made the study of business prospects a priority in their lives. . . . I have good news for these non-professionals: The typical
> What is a free market? In what ways does a free market economy differ from a centrally planned economy?
> Why should it matter legally whether Professor Anspach is correct that Hasbro’s Monopoly game closely resembles a game that had been played for decades before Charles Darrow claimed to have invented it? Does it matter economically? Briefly explain.
> The German company Koenig & Bauer has 90 percent of the world market for presses that print currency. Discuss the factors that would make it difficult for new companies to enter this market.
> If firms incurred no cost in developing new technologies and new products, would there be any need for patents? Briefly explain.
> Lawrence Katz, an economist at Harvard, was quoted in a newspaper article as arguing that differences between the incomes of male physicians and female physicians “are largely explained by individual choices.” He also noted that discrimination could acco
> How does a change in the price of a product cause both a substitution effect and an income effect?
> Use the following table to answer the questions. a. What is the average tax rate at each income level? b. Based on these data, is the tax progressive or regressive? Briefly explain. c. Is it possible based on these data to determine the marginal tax ra
> Suppose the government eliminates the income tax and replaces it with a consumption tax. With a consumption tax, individuals pay a tax on only the part of their income they spend rather than save. Think about the effect of this change on the market for a
> Using the numbers in the table, explain which country has a comparative advantage in producing smart watches. Output per Hour of Work Smartwatches Fitness Bracelets Switzerland 8 10 Canada
> Almost all states levy sales taxes on retail products, but about half of them exempt purchases of food. In addition, virtually all services are exempt from state sales taxes. Evaluate these tax rate differences, using the goals and principles of taxation
> Currently, the Social Security and Medicare programs are funded by payroll taxes rather than by the federal personal income tax. In 2015, the payroll tax for Social Security was 12.4 percent on wage, salary, and self-employment income up to $118,500. (Ha
> President Barack Obama proposed legislation that Congress failed to enact that would have included the so-called “Buffett Rule,” named after billionaire Warren Buffett, who noted that he was paying a lower tax rate than his secretary. The Buffett Rule wo
> Use the information in Table 18.2 on page 602 to calculate the total federal income tax paid, the marginal tax rate, and the average tax rate for people with the following incomes. (For simplicity, assume that these people have no exemptions or deduction
> Many state governments use lotteries to raise revenue. If we think of a lottery as a type of tax, is a lottery likely to be progressive or regressive? What data would you need to determine whether the effect of a lottery is progressive or regressive?
> The federal government imposes a tax on sales of cigarettes. The following data are from a Gallup poll: Based on these data, would the federal cigarette tax be considered progressive or regressive? Be sure to define progressive tax and regressive tax in
> An article in a Federal Reserve publication notes that “nearly all taxes create some market ineff iciency in the form of deadweight loss.” The article notes that when something is taxed, the result is “an outcome in which both [buyers and sellers] would
> Suppose that a large oil field is discovered in Michigan. By imposing a tax on the oil, the state government is able to eliminate the state income tax on wages. What is likely to be the effect on the labor supply curve in Michigan?
> Briefly discuss each of the five goals and principles governments consider when deciding which taxes to use.
> If the United States were to stop trading goods and services with other countries, which U.S. industries would be likely to see their sales decline the most? Briefly explain.
> Movie studios split ticket revenues with the owners of the movie theaters that show their films. An article in the Wall Street Journal in 2015 discussed how the Disney studio was attempting to negotiate a larger share of the ticket revenue because it had
> When Apple first launched Apple Music, singer Taylor Swift refused to allow her album 1989, which had been the bestselling album of 2014, to be made available for the service because Apple did not intend to pay royalties on songs it streamed during an in
> In a market economy, why does a f irm have a strong incentive to be productively efficient and allocatively efficient? What does the firm earn if it is productively and allocatively efficient, and what happens if it is not?
> What is the difference between a marginal tax rate and an average tax rate? Which is more important in determining the effect of a change in taxes on economic behavior?
> In 2012, Congress and President Barack Obama passed legislation raising tax rates on families earning $450,000 or more. Did this change in the law make the U.S. tax system more progressive or less progressive? Be sure to provide definitions of progressiv
> Which type of tax raises the most revenue for the federal government? What is the largest source of revenue for state and local governments?
> The late Nobel Laureate James Buchanan, who was one of the key figures in developing the public choice model, wrote, “The relevant difference between markets and politics does not lie in the kinds of values/interests that persons pursue, but in the condi
> In Chapter 4, we discussed the federal government’s agricultural programs. In arguing that the costs of these programs exceed their benefits, economist Vincent H. Smith stated, “The 10% to 15% of farm families that receive more than 85% of all farm subsi
> Most labor economists believe that many adult males are on a vertical section of their labor supply curves. Use the concepts of income and substitution effects to explain under what circumstances an individual’s labor supply curve would be vertical. Sou
> An article in the Wall Street Journal about attempts by Congress to rewrite the tax code to make it more efficient noted that there were many provisions in the code intended to reduce the taxes paid by industries in districts of the members of Congress s
> Patents are granted for 20 years, but pharmaceutical companies can’t use their patent-guaranteed monopoly powers for anywhere near this long because it takes several years to acquire approval of drugs from the Food and Drug Administration (FDA). Should t
> An article in the New York Times on President Obama’s unsuccessful attempt to eliminate tax benefits for college savings accounts notes, “In theory, tax reform is supposed to be built around cutting back preferences like these, in order to pay for some c
> An article in the Economist on the work of the late Nobel Laureate James Buchanan made the following observation: “It was important … to understand the ways that government could fail systematically.” a. What does government failure mean in this context?
> What does it mean to say that there is a separation of ownership from control in large corporations?
> Briefly explain whether you agree with the following argument: The median voter theorem will be an accurate predictor of the outcomes of elections when a majority of voters have preferences very similar to those of the median voter. When the majority of
> Michael Kinsley, a political columnist, observes: “The idea of insurance is to share the risks of bad outcomes.” In what sense does insurance involve sharing risks? How does the problem of adverse selection affect the ability of insurance to provide the
> Many political observers have noted that Republican presidential candidates tend to emphasize their conservative positions on policy issues while running for their party’s nomination, and Democratic presidential candidates tend to emphasize their liberal
> The Statistical Abstract of the United States was published for many years by the U.S. Census Bureau. The Abstract provided a summary of business, economic, social, and political statistics. It was available for free online, and a printed copy could also
> Will the preferences shown in the following table lead to a voting paradox? Briefly explain. Policy Lena David Kathleen Cancer research 1st 2nd 3rd Mass transit 2nd 1st 1st Border security 3rd 3rd 2nd
> What is the relationship between market failure and government failure?
> A columnist writing in the Wall Street Journal argues that because “hourly wages in real terms” rose, the “price of time” also rose. What is the “price of time”? Is the columnist correct that when real hourly wages rise, the price of time increases? Brie
> The U.S. Postal Service (USPS) is a monopoly because the federal government has blocked entry into the market for delivering first-class mail. Is the USPS also a natural monopoly? How can we tell? What would happen if the law preventing competition in th
> What is rent seeking, and how is it related to regulatory capture?
> What is the difference between the voting paradox and the Arrow impossibility theorem?
> What is the public choice model?
> In equilibrium, what determines the price of capital? What determines the price of natural resources? What is an economic rent?
> In what sense have improvements in the health of the average American caused the U.S. production possibilities frontier to shift out? Panel (a) in Figure 7.1 on page 220 indicates that life expectancy in the United States declined in 1918. What effect di
> When the contact lens firm discussed in the Making the Connection implemented a new compensation plan, who benefited from the change? Is it likely that there were any losers from the change? Briefly explain.
> For years, the Goodyear Tire & Rubber Company compensated its sales force by paying a salesperson a salary plus a bonus, based on the number of tires he or she sold. Eventually, Goodyear made two changes to this policy: (1) The basis for the bonus was c
> Use the following graph for Yolanda’s Frozen Yogurt Stand to answer the questions on the next page. a. Use the midpoint formula to calculate the price elasticity of demand for D1 between point A and point C and the price elasticity of
> In most jobs, the harder you work, the more you earn. Some workers would rather work harder and earn more; others would rather work less hard, even though as a result they earn less. Suppose, though, that all workers at a company fall into the “work hard
> Many companies that pay workers an hourly wage require some minimum level of acceptable output. Suppose a company that has been using this system decides to switch to a piece-rate system under which workers are compensated on the basis of how much output
> What is “natural” about a natural monopoly?
> Daniel was earning $65 per hour and working 45 hours per week. Then Daniel’s wage rose to $75 per hour, and as a result, he now works 40 hours per week. What can we conclude from this information about the income effect and the substitution effect of a w
> Consider two goods: pizza and Coke. Along an individual’s demand curve for pizza, as the price of pizza falls, does the marginal utility per dollar spent on pizza always equal the marginal utility per dollar spent on Coke? In other words, does the rule o
> According to a study, the number of jobs in which firms used bonuses, commissions, or piece rates to tie workers’ pay to their performance increased from an estimated 30 percent of all jobs in the 1970s to 40 percent in the 1990s. Why would systems that
> If piece-rate or commission systems of compensating workers have important advantages for firms, why don’t more firms use them?
> What are the two ways that the productivity of a firm’s employees may increase when a firm moves from straight-time pay to commission or piece-rate pay?
> What is personnel economics?
> What are the key factors that determine the profitability of a firm in a monopolistically competitive market?
> Baseball writer Rany Jazayerli assessed then Kansas City Royals outfielder Jose Guillen as follows: “Guillen has negative value the way his contract stands.” How could a baseball player’s contract cause him to have negative value to a baseball team? Sou
> What is the law of demand? Use the substitution effect and the income effect to explain why an increase in the price of a product causes a decrease in the quantity demanded.
> State whether each of the following events will result in a movement along the market demand curve for labor in electronics factories in China or whether it will cause the market demand curve for labor to shift. If the demand curve shifts, indicate wheth
> What is a public franchise? Are all public franchises natural monopolies?
> The great baseball player Ty Cobb had a reputation for being very thrifty. Near the end of his life, he was interviewed by a reporter who was surprised to find that Cobb used candles, rather than electricity, to light his home. From Ty Cobb’s point of vi
> Were the shares of stock issued as a result of Twitter’s initial public offering (IPO) sold in a primary market or a secondary market? Was the IPO an example of direct finance or indirect finance?
> If you own the only hardware store in a small town, do you have a monopoly?
> What is a monopoly? Can a firm be a monopoly if close substitutes for its product exist?
> Describe the five competitive forces model.
> Refer to Figure 14.5 on page 484. Consider the entries in the row of the payoff matrix that correspond to Saudi Arabia choosing “Low Output.” Suppose the numbers change so that Nigeria’s profit is $15
> Suppose that in the situation shown in Figure 14.7 on page 487, TruImage’s prof it is $1.5 million if the firm accepts Dell’s contract offer of $20 per copy. Now will Dell offer TruImage a contract for $20 per copy or
> During the 1970s, many women changed their minds about whether they would leave the labor force after marrying and having children or whether they would be in the labor force most of their adult lives. In 1968, the National Longitudinal Survey asked a re
> Use the information on the kumquat market in the table to answer the following questions: a. What are the equilibrium price and quantity? How much revenue do kumquat producers receive when the market is in equilibrium? Draw a graph showing the market e
