Question: The menu at Joe’s coffee shop

> In a discussion of tuition rates, a university official argues that the demand for admission is completely price inelastic.As evidence, she notes that while the university has doubled its tuition (in real terms) over the past 15 years, neither the number

> Explain why the industry supply curve is not the long-run industry marginal cost curve.

> Suppose that Bridget and Erin spend their incomes on two goods, food (F) and clothing (C).Bridget’s preferences are represented by the utility function U(F,C)=10FC, while Erin’s preferences are represented by the utility function U(F,C)= 20F2C2. a.With f

> A recent issue of Business Week reported the following: During the recent auto sales slump, GM, Ford, and Chrysler decided it was cheaper to sell cars to rental companies at a loss than to lay off workers.That’s because closing and reopening plants is e

> Why do some investors put a large portion of their portfolios into risky asset, while others invest largely in risk-free alternatives?

> What does it mean for consumers to maximize expected utility?Can you think of a case in which a person might not maximize expected utility?

> In 2007, Americans smoked 19.2 billion packs of cigarettes.They paid an average retail price of $4.50 per pack. a. Given that the elasticity of supply is 0.5 and the elasticity of demand is –0.4, derive linear demand and supply curves for cigarettes. b.

> Jon is always willing to trade one can of Coke for one can of Sprite, or one can of Sprite for one can of Coke. a. What can you say about Jon’s marginal rate of substitution? b. Draw a set of indifference curves for Jon. c. Draw two budget lines with dif

> Suppose an investor is concerned about a business choice in which there are three prospects, the probability and returns are given below: Probability………………Return 0.4…………...$100

> Suppose that an individual allocates his or her entire budget between two goods, food and clothing.Can both goods be inferior?Explain.

> Upon merging with the West German economy, East German consumers indicated a preference for Mercedes-Benz automobiles over Volkswagens.However, when they converted their savings into deutsche marks, they flocked to Volkswagen dealerships.How can you expl

> What is the difference between economies of scale and returns to scale?

> A competitive firm has the following short-run cost function: C(q)= q3 −8q2 +30q+5. a.Find MC, AC, and AVC and sketch them on a graph. b. At what range of prices will the firm supply zero output? c. Identify the firm’s supply curve on your graph. d. At w

> Two individuals, Sam and Barb, derive utility from the hours of leisure (L) they consume and from the amount of goods (G) they consume.In order to maximize utility, they need to allocate the 24 hours in the day between leisure hours and work hours.Assume

> Joe quits his computer programming job, where he was earning a salary of $50,000 per year, to start .He opens his own computer software business store in a building that he owns and was previously renting out for $24,000 per year.In his first year of bus

> If a 3-percent increase in the price of corn flakes causes a 6-percent decline in the quantity demanded, what is the elasticity of demand?

> Explain why for many goods, the long-run price elasticity of supply is larger than the short-run elasticity.

> An increase in the demand for video films also increases the salaries of actors and actresses.Is the long-run supply curve for films likely to be horizontal or upward sloping?Explain.

> What is the difference between a production function and an isoquant?

> In this chapter, consumer preferences for various commodities did not change during the analysis.Yet in some situations, preferences do change as consumption occurs.Discuss why and how preferences might change over time with consumption of these two comm

> Suppose the government regulates the prices of beef and chicken and sets them below their market-clearing levels.Explain why shortages of these goods will develop and what factors will determine the sizes of the shortages.What will happen to the price of

> Draw indifference curves that represent the following individuals’ preferences for hamburgers and soft drinks.Indicate the direction in which the individuals’ satisfaction (or utility) is increasing. a.Joe has convex preferences and dislikes both hamburg

> Suppose that the Japanese yen rises against the U.S. dollar – that is, it will take more dollars to buy any given amount of Japanese yen.Explain why this increase simultaneously increases the real price of Japanese cars for U.S. consumers and lowers the

> A certain brand of vacuum cleaners can be purchased from several local stores as well as from several catalogue or website sources. a.If all sellers charge the same price for the vacuum cleaner, will they all earn zero economic profit in the long run? b.

> Faced with constantly changing conditions, why would a firm ever keep any factors fixed?What criteria determine whether a factor is fixed or variable?

> Suppose the price of regular-octane gasoline were 20 cents per gallon higher in New Jersey than in Oklahoma.Do you think there would be an opportunity for arbitrage (i.e., that firms could buy gas in Oklahoma and then sell it at a profit in New Jersey)?W

> Is the firm’s expansion path always a straight line?

> Explain the difference between a shift in the supply curve and a movement along the supply curve.

> How can a price ceiling make consumers better off?Under what conditions might it make them worse off?

> Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold: a.An increase in the price of margarine. b.An increase in the price of milk. c.A decrease in average

> What is meant by deadweight loss?Why does a price ceiling usually result in a deadweight loss?

> The price of long-distance telephone service fell from 40 cents per minute in 1996 to 22 cents per minute in 1999, a 45-percent (18 cents/40 cents) decrease.The Consumer Price Index increased by 10 percent over this period.What happened to the real price

> Suppose you are in charge of a toll bridge that costs essentially nothing to operate.The demand for bridge crossings Q is given by P=15− 1/2 Q. a.Draw the demand curve for bridge crossings. b.How many people would cross the bridge if there were no toll?

> What is a production function?How does a long-run production function differ from a short-run production function?

> Why is an insurance company likely to behave as if it were risk neutral even if its managers are risk-averse individuals?

> Why does a tax create a deadweight loss?What determines the size of this loss?

> Fill in the gaps in the table below. Quantity of Variable Input Marginal Product of Variable Input Average Product of Variable Input Total Output 1 225 300 300 1140 225 225 2.

> The burden of a tax is shared by producers and consumers.Under what conditions will consumers pay most of the tax?Under what conditions will producers pay most of it?What determines the share of a subsidy that benefits consumers?

> Suppose the government wants to limit imports of a certain good.Is it preferable to use an import quota or a tariff?Why?

> You know that if a tax is imposed on a particular product, the burden of the tax is shared by producers and consumers.You also know that the demand for automobiles is characterized by a stock adjustment process.Suppose a special 20-percent sales tax is s

> At the time this book went to print, the minimum wage was $5.85.To find the current value of the CPI, go to http://www.bls.gov/cpi/home.htm.Click on Consumer Price Index- All Urban Consumers (Current Series) and select U.S. All items.This will give you t

> Why are isocost lines straight lines?

> Can a set of indifference curves be upward sloping?If so, what would this tell you about the two goods?

> How does a change in the price of one input change the firm’s long-run expansion path?

> Suppose the government wants to increase farmers’ incomes.Why do price supports or acreage-limitation programs cost society more than simply giving farmers money?

> Jane always gets twice as much utility from an extra ballet ticket as she does from an extra basketball ticket, regardless of how many tickets of either type she has.Draw Jane’s income-consumption curve and her Engel curve for ballet tickets.

> Are the following statements true or false?Explain your answers. a.The elasticity of demand is the same as the slope of the demand curve. b.The cross-price elasticity will always be positive. c.The supply of apartments is more inelastic in the short run

> Jane receives utility from days spent traveling on vacation domestically (D) and days spent traveling on vacation in a foreign country (F), as given by the utility function U(D,F) = 10DF.In addition, the price of a day spent traveling domestically is $10

> Antonio buys five new college textbooks during his first year at school at a cost of $80 each.Used books cost only $50 each.When the bookstore announces that there will be a 10 percent increase in the price of new books and a 5 percent increase in the pr

> 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

> 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 fo

> 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