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Question: Economist Richard Thaler of the University of


Economist Richard Thaler of the University of Chicago notes that most economists consider arbitrage to be one way “that markets can do their magic.” Briefly explain the role arbitrage can play in helping markets to work.

Source: Richard H. Thaler, “Unless You Are Spock, Irrelevant Things Matter in Economic Behavior,” New York Times, May 8, 2015.


> Sarah loans $50,000 to her best friend, John. John uses the money to open a pizza parlor next to the local high school. Three years later, when John still owed Sarah $15,000, John closed the pizza parlor and declared bankruptcy. Discuss the appropriate t

> Dr. John Brown is a physician who expects to make $150,000 this year from his medical practice. In addition, Dr. Brown expects to receive $10,000 dividends and interest income. Last year, on the advice of a friend, Dr. Brown invested $100,000 in Limited

> Stan Bushart works as a customer representative for a large corporation. Stan’s job entails traveling to meet with customers, and he uses his personal car 100% for business use. In 2017, Stan must decide whether to buy or lease a new ca

> Complete the following table for Terrell’s Televisions: a. From the information in the table, can you determine whether this firm is a price taker or a price maker? Briefly explain. b. Use the information in the table to draw a graph

> Frank Gunter owns an apple orchard. He employs 87 apple pickers and pays them each $8 per hour to pick apples, which he sells for $1.60 per box. If Frank is maximizing profit, what is the marginal revenue product of the last worker he hired? What is that

> What are the five most important variables that cause the market demand curve for labor to shift?

> Why is the demand curve for labor downward sloping?

> What is the difference between the marginal product of labor and the marginal revenue product of labor?

> Texas who has done a great deal of research on labor markets. According to an article in Forbes, Hamermesh writes that “below-average-looking men earn 17% less than those considered good-looking, while below-average-looking females earn 12% less than the

> In what sense is the demand for labor a derived demand?

> Using the following graph, show the effects on consumer surplus and producer surplus of an increase in supply from S1 to S2. By how much does economic surplus increase? Price S, 's S2 A P, D P2 E F D Q, Q2 Quantity

> Fernando has a monopoly on sales of pizzas in the small town of North Key Largo, Florida. Use the following information on the demand for Fernando’s pizzas to answer the questions. a. If Fernando can produce pizzas at a constant cost

> According to an opinion survey, Snoopy is the most appealing celebrity endorser. The beagle from the popular Peanuts comic strip appears in commercials for the insurance company MetLife. What advantages and disadvantages are there in using Snoopy, rather

> If patents, copyrights, and trademarks reduce competition, why does the federal government grant them?

> Draw a production possibilities frontier that shows the trade-off between the production of cotton and the production of soybeans. a. Show the effect that a prolonged drought would have on the initial production possibilities frontier. b. Suppose that ge

> Many supermarkets provide regular shoppers with “loyalty cards” that the shopper’s swipe each time they check out. By swiping the card, a shopper receives reduced prices on a few goods, and the supermarket compiles information on all the shoppers’ purcha

> Walt Disney World charges residents of Florida lower prices for theme park tickets than it charges non-Florida residents. For example, in 2015, an adult Florida resident was charged $201.29 for a three-day ticket. The price of the same package for a non-

> In 2012, some electronics firms began offering Ultra HD, often called 4K, televisions. These televisions offer a crisper picture than conventional HD televisions. Initially, these televisions had prices as high as $20,000. One electronics industry analys

> Jason Furman and Tim Simcoe, the chair of and a senior economist for President Barack Obama’s Council of Economic Advisors, wrote, “Economists have studied [price discrimination] for many years, and while big data seems poised to revolutionize pricing pr

> In addition to discounting the price of computers purchased by students and faculty, Apple sells certain computer models only to schools and universities. According to a discussion on the Mac Rumors blog: Apple has quietly launched a lower cost $999 iMac

> An article in the New York Times reports that some firms request job applicants to report their SAT scores, even when the job applicant is middle-aged and took the test decades before. The article notes: SATs and other academic artifacts remain relevant

> Use the graphs above to answer the questions. a. If this firm wants to maximize profits, what price will it charge in Market 1, and what quantity will it sell? b. If this firm wants to maximize profits, what price will it charge in Market 2, and what qua

> A state law in California makes it illegal for businesses to charge men and women different prices for dry cleaning, laundry, tailoring, or hair grooming. The state legislator who introduced the law did so after a dry cleaner charged her more to have her

> Online newspapers can earn revenue from subscriptions and from advertisements. The more readers who access the paper’s site, the higher the advertising revenue the paper earns. To increase revenue, in 2011 the New York Times began offering online subscri

> What are the four most important ways a firm becomes a monopoly?

> BMW sells cars in China at a price two to three times higher than in the United States. Some people have purchased BMWs in the United States and exported them for resale in China. An article in the Wall Street Journal quoted a spokesperson for BMW as sta

> In most cities, firms that own office buildings can renovate them for use as residential apartments. According to a news story, in many cities “residential rents are surpassing office rents.” Predict the effect of this trend on the supply of office space

> Do you agree with the following statement: “The problem with economics is that it assumes that consumers and firms always make the correct decisions? But we know that everyone makes mistakes.”

> On most days, the price of a rose is $1, and 8,000 roses are purchased. On Valentine’s Day, the price of a rose jumps to $2, and 30,000 roses are purchased. a. Draw a demand and supply graph that shows why the price jumps. b. Based on this information, w

> Some professional sports teams charge fans a one-time lump sum for a personal seat license. The personal seat license allows a fan the right to buy season tickets each year. No one without a personal seat license can buy season tickets. After the origina

> When asked what was most valuable about the big data Disney was collecting from its MagicBands program, the executive in charge of the program stated, “The biggest value comes from being able to segment customers into better, smarter segments so you know

> While in Shanghai, China, to teach an MBA course, Craig Richardson, an economics professor from Winston- Salem State University, asked his American students to haggle with sellers in a market where prices for the same items can vary widely. Professor Ric

> Why might employers be more likely to interview a job applicant with a white-sounding name than an applicant with an African-American–sounding name? Leaving aside legal penalties, will employers who follow this practice incur an economic penalty? Briefly

> Some people—usually business travelers—have a very strong desire to fly to a particular city on a particular day, and airlines charge these travelers higher ticket prices than they charge other people, such as families who are planning vacations months i

> Is it possible to practice price discrimination across time? Briefly explain.

> Many antibiotics are no longer effective in eliminating infections because bacteria have evolved to become resistant to them. Some bacteria are now resistant to all but one or two existing antibiotics. In 2015, the Obama administration proposed subsidizi

> What is perfect price discrimination? Is it likely to ever occur? Is perfect price discrimination economically efficient? Briefly explain.

> What is yield management? Give an example of a firm using yield management to increase profits.

> In 2015, the Rock and Roll Hall of Fame and Museum charged adults $25.85 for admission. Seniors (65 years and older) and military personnel were charged $20.50, and children between 9 and 12 years old were charged $16.25. Use the admission fees to rank t

> What is price discrimination? Under what circumstances can a firm successfully practice price discrimination?

> Suspicions about arbitrage have a long history. For example, Valerian of Cimiez, a Catholic bishop who lived during the fifth century, wrote: “When something is bought cheaply only so it can be retailed dearly, doing business always means cheating.” What

> Briefly explain whether you agree with the following observation: “Technological change refers only to the introduction of new products, so it is not relevant to the operations of most firms.”

> Suppose California has many apple trees, and the price of apples there is low. Nevada has few apple trees, and the price of apples there is high. Abner buys low-priced California apples and ships them to Nevada, where he resells them at a high price. Is

> A political commentator makes the following statement: The idea that international trade should be based on the comparative advantage of each country is fine for rich countries like the United States and Japan. Rich countries have educated workers and la

> A column in the New York Times has the headline, “Should We Tax People for Being Annoying?” a. Do annoying people cause a negative externality? Should they be taxed? Do crying babies on a bus or plane cause a negative externality? Should the babies (or t

> What are the three most important variables that cause the market supply curve of labor to shift?

> In discussing the NCAA, the late Nobel Laureate Gary Becker, an economist, wrote, “It is impossible for an outsider to look at these [NCAA] rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains comp

> An article on espn.com about declining attendance at college football games noted that schools in the central time zone had particular problems with attendance at games that started at 11 a.m. The athletic director at the University of Illinois was quote

> Prices for many goods are higher in the city of Shenzhen on the mainland of China than in the city of Hong Kong. An article in the Economist notes that “individuals can arbitrage these differences through what effectively amounts to smuggling.” a. Explai

> Does a product always have to sell for the same price everywhere? Briefly explain.

> What is the law of one price? What is arbitrage?

> Suppose that the city has given Jorge a monopoly selling baseball caps at the local minor league stadium. Use the following graph to answer the questions. a. What quantity will Jorge produce, and what price will he charge? b. How much profit will Jorge

> Suppose a second seafood restaurant opens in Stonington, Maine. Will consumer surplus and economic efficiency necessarily increase? Briefly explain.

> If a market is a monopoly, will a negative externality in production always lead to production beyond the level of economic efficiency? Use a graph to illustrate your answer.

> What is meant by a consumer’s budget constraint? What is the rule of equal marginal utility per dollar spent?

> Most cities own the water system that provides water to homes and businesses. Some cities charge a flat monthly fee, while other cities charge by the gallon. Which method of pricing is more likely to result in economic efficiency in the water market? Be

> Patrick J. Buchanan, a former presidential candidate, argued in his book on the global economy that there is a flaw in David Ricardo’s theory of comparative advantage: Classical free trade theory fails the test of common sense. According to Ricardo’s law

> Give an example of a firm using a two-part tariff as part of its pricing strategy.

> Economist Harvey Leibenstein argued that the loss of economic efficiency in industries that are not perfectly competitive has been understated. He argued that when competition is weak, firms are under less pressure to adopt the best techniques or to hold

> Paolo and Alfredo are twins who both want to open pizza restaurants. Their parents have always liked Alfredo best, and they buy two pizza ovens and give both to him. Unfortunately, Paolo must buy his own pizza ovens. Does Alfredo have a lower cost of pro

> Review Figure 15.5 on page 512 on the inefficiency of monopoly. Will the deadweight loss due to monopoly be larger if the demand is elastic or if it is inelastic? Briefly explain. Figure 15.5: Price and cost MC Transfer of consumer surplus to monop

> 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

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