What are diseconomies of scale? What is the main reason that a firm eventually encounters diseconomies of scale as it keeps increasing the size of its store or factory?
> Briefly discuss the effect of price elasticity of supply and demand on tax incidence.
> What does tax incidence mean?
> In late 2014, oil prices were falling, but some energy traders were convinced that oil prices would begin to rise within a few months. According to a news story, these expectations were causing some “traders to put oil in storage while they wait for pric
> The following data summarize the trade between Canada and the United States in 2013 and 2014. In each year, the value of Canada’s exports to the United States exceeded the value of U.S. exports to Canada. Can we conclude that foreign
> What is producer surplus? How does producer surplus change as the equilibrium price of a good rises or falls?
> Briefly explain which of the following statements represent positive analysis and which represent normative analysis. a. A 50-cent-per-pack tax on cigarettes will lead to a 12 percent reduction in smoking by teenagers. b. The federal government should sp
> Under Armour, Inc., was founded in 1996 by Kevin Plank, a 23-year-old former University of Maryland football player. The company specializes in manufacturing and selling athletic and casual apparel made from synthetic material that repels moisture. The c
> The following graph represents the situation of a perfectly competitive firm. Indicate on the graph the areas that represent the following: a. Total cost b. Total revenue c. Variable cost d. Profit or loss Briefly explain whether the firm will continue
> Matt Rafferty produces hiking boots in the perfectly competitive hiking boots market. a. Fill in the missing values in the following table. b. Suppose the equilibrium price in the hiking boots market is $100. How many pairs of boots should Matt produce
> Ed Scahill produces table lamps in the perfectly competitive desk lamp market. a. Fill in the missing values in the following table. b. Suppose the equilibrium price in the desk lamp market is $50. How many table lamps should Ed produce, and how much p
> Consider a firm in each of the following three situations. For each situation, carefully explain whether the firm will produce in the short run or shut down in the short run. Situation 1 Situation 2 Situation 3 Price $10 $10 $10 Quantity 1,000 1,000
> How is the market supply curve derived from the supply curves of individual firms?
> What is the relationship between a perfectly competitive firm’s marginal cost curve and its supply curve?
> At one point, Time Warner and the Walt Disney Company discussed merging their news operations. Time Warner owns Cable News Network (CNN), and Disney owns ABC News. After analyzing the situation, the companies decided that a combined news operation would
> What is the difference between a firm’s shutdown point in the short run and in the long run? Why are firms willing to accept losses in the short run but not in the long run?
> The following graph represents the situation of Marguerite’s Caps, a firm selling caps in the perfectly competitive cap industry: a. How much output should Marguerite produce to maximize her profits? b. How much profit will she earn?
> Suppose that the price of oil doubles, raising the cost of home-heating oil and electricity. What effect would this development have on U.S. firms manufacturing solar panels? Illustrate your answer with two graphs: one showing the situation in the market
> What is limited liability? Why does the government grant limited liability to the owners of corporations?
> Use the midpoint formula for calculating elasticity to calculate the price elasticity of supply between point A and point B for each panel of Figure 6.5 on page 206. Figure 6.5: Price Price (dollars (dollars Supplyet 1. With olastic supply, an increa
> In The Wealth of Nations, Adam Smith discussed what has come to be known as the “diamond and water paradox”: Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrar
> An article in the Wall Street Journal discussed the financial results for BlackBerry, the smart phone and software company: “Revenue tumbled 32% from a year earlier to $658 million in the quarter ended May 30 from $966 million a year earlier…. BlackBerry
> A student examines the following graph and argues: “I believe that a firm will want to produce at Q1, not at Q2. At Q1, the distance between price and marginal cost is the greatest. Therefore, at Q1, the firm will be maximizing its prof
> Suppose the equilibrium price of basketballs falls to $2.50. Now how many basketballs will Andy produce? What price will he charge? How much profit (or loss) will he make?
> Frances sells pencils in the perfectly competitive pencil market. Her output per day and her costs are as follows: a. If the current equilibrium price in the pencil market is $1.80, how many pencils will Frances produce, what price will she charge, and
> Draw a graph showing a firm that is operating at a loss in a perfectly competitive market. Be sure your graph includes the firm’s demand curve, marginal revenue curve, marginal cost curve, average total cost curve, and average variable cost curve and mak
> Draw a graph showing a firm that is making a profit in a perfectly competitive market. Be sure your graph includes the firm’s demand curve, marginal revenue curve, marginal cost curve, average total cost curve, and average variable cost curve and make su
> In Table 12.3 what are Farmer Parker’s fixed costs? Suppose that his fixed costs increase by $10. Will this increase change the profit-maximizing level of production for Farmer Parker? Briefly explain. How much profit will Farmer Parker
> An article in the Wall Street Journal discussed the purchase of the small Zipcar rental car firm by the much larger Avis. The article predicted that the purchase would be successful because of the “efficiencies gained by putting the two companies togethe
> In 1879, economist Henry George published Progress and Poverty, which became one of the best-selling books of the nineteenth century. In this book, George argued that all existing taxes should be replaced with a single tax on land. Tax incidence refers t
> Briefly describe changes over time in the health of the average person in the United States.
> Suppose that the marginal cost of wheat is $0.50 higher for every bushel of wheat produced. For example, the marginal cost of producing the eighth bushel of wheat is now $9.50. Assume that the price of wheat remains $7 per bushel. Will this increase in m
> Under what circumstances are firms likely to produce more of a good or service? Under what circumstances are firms likely to produce less of a good or service?
> Suppose the price of wheat falls to $5.50 per bushel. How many bushels of wheat will Farmer Parker produce, and how much profit will he make? Briefly explain. Table 12.3: (1) Quantity (bushels) (Q) (2) Total Revenue (4) Profit (TR – TC) (5) Marginal
> Why don’t firms maximize revenue rather than profit? Briefly explain whether a firm that maximized revenue would be likely to produce a smaller or larger quantity than if it were maximizing profit.
> A student argues: “To maximize profit, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be fa
> Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition MR = MC is equivalent to the condition P = MC.
> Explain why at the level of output where the difference between TR and TC is at its maximum positive value, MR must equal MC.
> Explain why it is true that for a firm in a perfectly competitive market, P = MR = AR.
> In 2015, some beer drinkers f iled a lawsuit against Anheuser-Busch, the brewer of Beck’s beer. The beer drinkers claimed that Beck’s was marketed as an authentic German beer but was actually brewed in St. Louis. Other breweries have established faciliti
> The financial writer Andrew Tobias described an incident that occurred when he was a student at the Harvard Business School: Each student in the class was given large amounts of information about a particular firm and asked to determine a pricing strateg
> If a 10 percent increase in the price of Cheerios causes a 25 percent reduction in the number of boxes of Cheerios demanded, what is the price elasticity of demand for Cheerios? Is the demand for Cheerios elastic or inelastic?
> Explain whether you agree with the following remark: According to the model of perfectly competitive markets, the demand curve for wheat should be a horizontal line. But this can’t be true: When the price of wheat rises, the quantity of wheat demanded fa
> Suppose that Jill Johnson has to choose between building a smaller restaurant and a larger restaurant. In the graph on the next page, the relationship between costs and output for the smaller restaurant is represented by the curve ATC1, and the relations
> Suppose an economist develops an economic model and finds that “it works great in theory, but it fails in practice.” What should the economist do next?
> The late Nobel Prize–winning economist George Stigler once wrote, “the most common and most important criticism of perfect competition … [is] that it is unrealistic.” Since few firms sell identical products in markets where there are no barriers to entry
> Explain whether each of the following is a perfectly competitive market. For each market that is not perfectly competitive, explain why it is not. a. Corn farming b. Coffee shops c. Automobile manufacturing d. New home construction
> Draw a graph showing the market demand and supply curves for corn and the demand curve for the corn produced by one corn farmer. Be sure to indicate the market price and the price the corn farmer receives.
> What is a price taker? When are firms likely to be price takers?
> What are the three conditions for a market to be perfectly competitive?
> What are economies of scale? What are four reasons that firms may experience economies of scale?
> When will the private cost of producing a good differ from the social cost? Give an example. When will the private benefit from consuming a good differ from the social benefit? Give an example.
> What is minimum efficient scale? What is likely to happen in the long run to firms that do not reach minimum efficient scale?
> What is the difference between total cost and variable cost in the long run?
> Explain how the events listed in (a) through (d) would affect the following costs at Southwest Airlines: 1. Marginal cost 2. Average variable cost 3. Average fixed cost 4. Average total cost a. Southwest signs a new contract with the Transport Workers Un
> Which of the following products are most likely to have significant network externalities? Briefly explain. a. Smart watches b. Dog food c. Board games d. LCD televisions e. 3D televisions
> An article in the Wall Street Journal described the Chinese automobile industry as “a hodgepodge of companies,” most of which produce fewer than 100,000 cars per year. Ford Chief Executive Alan Mulally commented on the situation by saying, “If you don’t
> List the errors in the following graph. Carefully explain why the curves drawn this way are incorrect. In other words, why can’t these curves be as they are shown in the graph? Costs AFC AVC ATC Quantity of output
> Use the information in the graph to find the values for the following at an output level of 1,000. a. Marginal cost b. Total cost c. Variable cost d. Fixed cost Costs MC ATC AVC $30 15 1,000 Quantity of output 20
> We saw in the chapter opener that some colleges and private companies have launched online courses that anyone with an Internet connection can take. The most successful of these massive open online courses (MOOCs) have attracted tens of thousands of stud
> In the ancient world, a book could be produced either on a scroll or as a codex, which was made of folded sheets glued together, something like a modern book. One scholar has estimated the following variable costs (in Greek drachmas) of the two methods:
> One description of the costs of operating a railroad makes the following observation: “The fixed … expenses which attach to the operation of railroads … are in the nature of a tax upon the business of the road; the smaller the [amount of] business, the l
> What is marginal cost? Why is the supply curve referred to as a marginal cost curve?
> Suppose the total cost of producing 10,000 tennis balls is $30,000 and the fixed cost is $10,000. a. What is the variable cost? b. When output is 10,000, what are the average variable cost and the average fixed cost? c. Assume that the cost curves have t
> As the level of output increases, what happens to the difference between the value of average total cost and the value of average variable cost?
> Where does the marginal cost curve intersect the average variable cost curve and the average total cost curve?
> Using symbols, we can write that the marginal product of labor is equal to Q> L. Marginal cost is equal to TC> Q. Because fixed costs by definition don’t change, marginal cost is also equal to VC> Q. If Jill Johnson’s only variable cost (VC) is l
> An article in the Wall Street Journal gave the following explanation of how products were traditionally priced at Parker-Hannifin Corporation: For as long as anyone at the 89-year-old company could recall, Parker used the same simple formula to determine
> Is Jill Johnson correct when she states the following: “I am currently producing 20,000 pizzas per month at a total cost of $75,000? If I produce 20,001 pizzas, my total cost will rise to $75,002. Therefore, my marginal cost of producing pizzas must be i
> Why can short-run average cost never be less than long run average cost for a given level of output?
> Is Jill Johnson correct when she states the following: “I am currently producing 10,000 pizzas per month at a total cost of $50,000.00? If I produce 10,001 pizzas, my total cost will rise to $50,011.00. Therefore, my marginal cost of producing pizzas mus
> Santiago Delgado owns a copier store. He leases two copy machines for which he pays $20 each per day. He cannot increase the number of machines he leases without giving the office machine company six weeks’ notice. He can hire as many w
> Suppose a firm has no fixed costs, so all its costs are variable, even in the short run. a. If the firm’s marginal costs are continually increasing (that is, marginal cost is increasing from the first unit of output produced), will the firm’s average tot
> What do economists mean when they use the Latin expression ceteris paribus?
> Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.
> Older oil wells that produce fewer than 10 barrels of oil a day are called “stripper” wells. Suppose that you and a partner own a stripper well that can produce 8 barrels of oil per day, and you estimate that the marginal cost of producing another barrel
> Explain why the marginal cost curve intersects the average total cost curve at the level of output where average total cost is at a minimum.
> Explain why the marginal cost curve intersects the average total cost curve at the level of output where average total cost is at a minimum.
> If the marginal product of labor is rising, is the marginal cost of production rising or falling? Briefly explain.
> Does everyone gain from international trade? If not, explain which groups lose.
> If the marginal product of labor is rising, is the marginal cost of production rising or falling? Briefly explain.
> The following table shows the quantity of workers and total output for a local pizza parlor. Answer the following questions based on this table: a. When the owner hires 4 workers, what is average product of labor? b. What is the marginal product of the
> Small business owner Jay Goltz described several decisions he made to reduce the fixed costs of his businesses, including replacing halogen lamps with LED lamps. Goltz noted, “I’m guessing that many business owners could save a lot more than pennies on t
> Is it possible for a firm to experience a technological change that would increase the marginal product of labor while leaving the average product of labor unchanged? Explain.
> What is a production possibilities frontier? How can we show efficiency on a production possibilities frontier? How can we show inefficiency? What causes a production possibilities frontier to shift outward?
> Sally looks at her college transcript and asks you, “How is this possible? My grade point average for this semester’s courses is higher than my grade point average for last semester’s courses, but my cumulative grade point average still went down from la
> Briefly explain whether you agree with the following argument: Adam Smith’s idea of the gains to firms from the division of labor makes a lot of sense when the good being manufactured is something complex like automobiles or computers, but it doesn’t app
> A student looks at the numbers in Table 11.3 on page 371 and draws this conclusion: The marginal product of labor is increasing for the first two workers hired, and then it declines for the next four workers. I guess each of the first two workers must ha
> Use the numbers from problem 3.4 to draw one graph that shows how total output increases with the quantity of workers hired and a second graph that shows the marginal product of labor and the average product of labor. Problem 3.4: Marginal Product of
> Fill in the missing values in the following table. Marginal Product of Product of Labor Average Quantity of Workers Total Output Labor 1 400 900 3 1,500 4 1,900 2,200 2,400 7. 2,300 2. 6.
> What is the law of diminishing returns? Does it apply in the long run?
> Would a business be expected to survive in the long run if it earned a positive accounting profit but a negative economic profit? Briefly explain.
> When the DuPont chemical company first attempted to enter the paint business, it was not successful. According to a company report, in one year it “lost nearly $500,000 in actual cash in addition to an expected return on investment of nearly $500,000, wh
> How do specialization and division of labor typically affect the marginal product of labor?
> Draw a graph that shows the usual relationship between the marginal product of labor and the average product of labor. Why do the marginal product of labor and the average product of labor curves have the shapes you drew?
> Briefly discuss each of the following economic ideas: People are rational, people respond to economic incentives, and optimal decisions are made at the margin.
> What is the production function? What does the short run production function hold constant?
> Although New York State is second only to Washington State in production of apples, its production has been declining during the past 20 years. The decline has been particularly steep in counties close to New York City. In 1985, there were more than 11,0
> What are implicit costs? How are they different from explicit costs?
> Distinguish between a firm’s fixed costs and variable costs and give an example of each.
> What is the difference between the short run and the long run? Is the amount of time that separates the short run from the long run the same for every firm?
